Dollar Cost Averaging

Dollar cost averaging

See: Constant dollar plan

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Dollar-Cost Averaging

An investment strategy in which one makes investments in the same dollar amount at regular times. For example, one may buy $1,000 in Stock A every month, regardless of Stock A's current price. Because this means one buys fewer shares when the price is high and more when the price is low, dollar-cost averaging aims to reduce the average cost of the shares one buys. This increases the profit per share when one sells the stock. Dollar cost averaging is most common with shares of a mutual fund or a retirement plan. It is also called a constant dollar plan.

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Dollar cost averaging. Dollar cost averaging means adding a fixed amount of money on a regular schedule to an investment account, such as a mutual fund, retirement account, or a dividend reinvestment plan (DRIP).

Since the share price of the investment fluctuates, you buy fewer shares when the share price is higher and more shares when the price is lower.

The advantage of this type of formula investing, which is also sometimes called a constant dollar plan, is that, over time, the average price you pay per share is lower than the actual average price per share.

But to get the most from this approach, you have to invest regularly, including during prolonged downturns when the prices of the investment drop. Otherwise you are buying only at the higher prices.

Despite its advantages, dollar cost averaging does not guarantee a profit and doesn't protect you from losses in a falling market.