Dollar-Cost Averaging

Dollar-cost averaging (DCA) is an investment strategy where you invest a fixed dollar amount at regular intervals, regardless of the investment's current price. By investing consistently over time, you automatically buy more shares when prices are low and fewer when prices are high, potentially lowering your average cost per share. Here's how it works: Suppose you invest $500 monthly in a stock. When the price is $50, you buy 10 shares. When it drops to $40, you buy 12.5 shares. When it rises to $60, you buy 8.3 shares. Over time, you accumulate more shares at lower prices than at higher prices, effectively averaging your cost. DCA offers several psychological and practical benefits. It removes the stress of trying to time the market perfectly - a task even professionals struggle with. It enforces investment discipline by making investing automatic and habitual. It reduces the regret of investing a lump sum right before a market decline. The strategy is particularly valuable for regular savings like 401(k) contributions, where you're investing each paycheck anyway. It converts volatility from an enemy into a friend - market dips become opportunities to buy more shares rather than reasons to panic. However, DCA isn't always mathematically optimal. If you have a lump sum to invest and the market trends upward (as it has historically), investing everything immediately typically produces higher returns than spreading purchases over time. DCA trades some potential return for reduced timing risk and psychological comfort. Dollar-cost averaging is most valuable when you're investing regular income over time, when you're uncomfortable investing a lump sum all at once, or when market conditions are particularly uncertain. It's a sensible, low-stress approach to long-term wealth building that works well for most individual investors.