Dollar cost averaging

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Dollar cost averaging

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.

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.

References in periodicals archive ?
Dollar cost averaging does not ensure a profit or guarantee against loss in declining markets.
That's why many people espouse dollar cost averaging.
And since dollar cost averaging involves continuous investment in securities, you should consider your ability to continue purchases through periods of low prices.
Experts say dollar cost averaging is best for people who don't have a lot of money to invest but who can be consistent with a small monthly investment.
Contrast an investment strategy where an investor purchases the same number of shares of a mutual fund each month with a dollar cost averaging strategy where an investor purchases the same dollar amount of a mutual fund each month.
To illustrate how dollar cost averaging might work as an advantage, let's assume you decide to invest $1,000 in a mutual fund every three months.
Encourage clients to add to their portfolios using dollar cost averaging.
Another strategy financial advisors often recommend to their clients is dollar cost averaging, especially if the goal is long-term growth of capital.
Dollar cost averaging for stock options is the converse of dollar cost averaging for the standard stock investor.