Dollar Cost Averaging: A Steady Approach to Investing Over Time
Markets move. You know this from reading our Good Read on market volatility. Sometimes they climb steadily, and sometimes they face a harsh temporary downturn. It’s an inherent part of investing.
You also understand that diversification and asset allocation are key strategies for spreading your money across different types of investments rather than concentrating it in a single asset. Both involve dividing your money among categories like stocks, bonds, and cash investments based on your goals, time horizon, and risk tolerance.
Dollar-Cost Averaging: Investing on Autopilot
Dollar-cost averaging complements diversification, meaning you might consider investing the same amount of money at regular intervals—like $100 every month—regardless of market conditions. This method is very common for retirement contributions. When prices are high, you’d buy fewer shares. When prices are low, you’d buy more.
A Simple Example
Say you invested $100 each month for six months:
Month 1: Price = $10; you buy 10 shares
Month 2: Price = $5; you buy 20 shares
Months 3–6: Prices bounce around, but you kept buying
Your average market price might be higher (sum of market prices/number of months), but your average cost per share (total investment/number of shares purchased) could be lower assuming you bought more shares when prices dropped, potentially smoothing out the average cost per share.
How These Strategies Work Together
Diversification and asset allocation help spread out risk, while dollar-cost averaging keeps your savings steady and allows you to take advantage of market fluctuations. None of these strategies guarantees profits, but together they can help you stay invested without reacting emotionally to every headline and may reward patience and discipline over time.
Disclaimer: Creek & Lyells Financial Literacy Foundation does not provide financial services, nor does it recommend or advise visitors to open accounts or buy or sell securities. All content on this blog is for educational purposes only. While we strive to provide accurate, relevant, and well-vetted information, visitors should consult a licensed financial professional and carefully evaluate the risks of any financial decision before taking action.