What Is Dollar-Cost Averaging?
Dollar-cost averaging means investing the same amount of money on a regular schedule, like $100 every month, no matter what the price is.
How it works
When prices are high, your $100 buys fewer shares. When prices are low, the same $100 buys more. Over time, you end up with a fair average price without trying to guess the best moment.
A simple example
- Month 1: price $10, your $100 buys 10 shares.
- Month 2: price $5, your $100 buys 20 shares.
- Month 3: price $10, your $100 buys 10 shares.
You spent $300 and own 40 shares, so your average cost is $7.50, even though the price was $10 in two of the three months.
Why people like it
It removes the stress of timing the market. Nobody knows when the next bear market will come. It also builds a habit, which is the most important part of investing.
The downside
Markets go up more often than they go down. So if you already have a big sum, putting it all in at once has often done slightly better over time. Dollar-cost averaging trades a little return for a lot less regret.