Understanding Dollar Cost Averaging
Dollar Cost Average (DCA) is an approach to purchasing an investment in which the buyer spends out their purchases so that the total price paid is less affected by market timing.1 It is a strategy that can make it easier to deal with uncertain markets by making purchases automatic. It involves “investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price.”2
Advantages to DCA include potentially lowering the average cost per share and impact of volatility on investment portfolios. An example of Dollar Cost Averaging is your 401(k) plan. You invest regularly regardless of the price of the investment. You can choose the amount you want to contribute from each paycheck and investments are made automatically.
Benefits of Dollar Cost Averaging
- Can lower the average amount you spend on investments.
- Reinforces investing regularly to build your wealth over time.
- Reduces the stress of trying to figure out when to invest – it’s automatic.
- Removes the pitfalls of market timing.
- Takes emotion out of investing.
1/2 https://www.investopedia.com/terms/d/dollarcostaveraging.asp
Illustration: https://www.fool.com/terms/d/dollar-cost-averaging/
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