![]() Dollar-cost averaging can also be used in mutual fund accounts or index fund accounts separately from retirement accounts. If you have a 401(k), IRA, or other retirement plan, you are likely already utilizing dollar-cost averaging. Using Dollar-Cost Averaging: Who, When and How Who? It takes the emotion out of the investment process, too, as you can’t panic and sell all your shares at once. DCA works to investors’ advantage by “smoothing” their purchase prices over time, ensuring that an investor is not only investing at high points in the fluctuations of the stock market.īecause the purchases happen regardless of an asset’s price, and they happen at regular intervals, the dollar-cost averaging strategy removes an investor’s worry of timing the market to make purchases at the best prices. ![]() Over time, your average cost per share when you utilize dollar-cost investing often compares favorably to the price you would have paid if you’d tried to time your investment for one lump sum. While this has the potential to be more lucrative, it is also a much riskier endeavor if you time the market wrong. Investing over short-term periods is more similar to lump-sum investing, where an investor puts all of their money into the market at the same time. The dollar-cost averaging investor decides on the fixed amount of money to invest, and the period of time over which the investments will be made. That way, DCA lowers the total cost per share of the investment. Because the number of shares that you can buy for a given amount of money varies, dollar-cost averaging will let you buy more shares when the price is low, and fewer when shares are more expensive. Dollar-Cost Averaging In Actionĭollar-cost averaging gets its name from the idea that it reduces the average cost of shares that an investor buys. Instead, it evens out their investments over a longer period of time. Utilizing this method, you could potentially wind up with more shares than investing everything at once by capitalizing on market fluctuations.ĭollar-cost averaging is a long period investment strategy that prevents an investor from buying high or selling low. You could invest all of it at once, or you could invest $200 per month over a year-long period. Let's say you have $2400 to invest in ETF. An Example: Dollar-Cost Averaging with ETFs Then the average dollar amount smooths out over time, providing you with a regular long-term investment. ![]() Dollar-cost average investors buy when the market is temporarily dipping down to capitalize on the lower prices, since many other investors will sell their shares for a lower price. This method works best in bear markets, where you can purchase stock at low points when investors are less likely to buy. You're likely already using dollar-cost averaging if you have a 401k or if you invest a portion of every paycheck. This can result in paying a lower average price per share over time," explains FINRA. "When you dollar-cost average, you buy more shares of an investment when the share price is low and fewer shares when the share price is high. ![]() So, if you're given a large sum of money, say a bonus or inheritance for example, you could invest it all at once or you could use dollar-cost averaging. Lump-sum investing can be risky if you don't time the market well. This strategy is contrasted to lump-sum investing where you pour a large sum of money into the market at once. ![]() What Is Dollar-Cost Averaging?Īlso called the constant dollar plan, dollar-cost averaging is an investment strategy that invests equal amounts in the stock market at regular intervals. Though we'll refer to buying for most of the article, just note that the underlying idea is the same. It's important to note that dollar-cost averaging also applies to selling - you can attempt to smooth out market fluctuations by selling your investment, RSUs in your company for example, at consistent intervals. DCA aims to reduce the impact of volatility by averaging market fluctuations (and you may even already be using it). You've probably heard that it's best to buy low and sell high, but in practice, it's very difficult to time the market.ĭollar-cost averaging (DCA) takes away the guessing and allows you to consistently invest equal amounts of money. When you have money to invest, you might be wondering which investment strategy will minimize your risk and maximize your reward. ![]()
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