wealtheducation-what_is_dollar_cost

What is Dollar Cost Averaging?

Dollar cost averaging is a technique to reduce market risk through a systematic purchase of securities at predetermined intervals and at set amounts. Many successful investors already practice without realizing through participating in a regular savings plan.

Dollar cost averaging can lower an investor's cost of investment and reduce his risk of investing at the top of a market cycle.

The beauty of dollar cost averaging is that you buy more shares when prices are low and fewer shares when prices are higher. The result is an average cost that is better than trying to time the market with your investments.

Instead of investing all his money at one go, the investor gradually builds up a position by purchasing smaller amounts over a period of time. This spreads the average cost over the period, therefore providing a buffer against market volatility.

In order to begin a dollar cost averaging plan, you must do three things:

1. Decide exactly how much money you can invest each month. To be effective, you should have sufficient funds to continue investing through the market cycle.

2. Select an investment (index funds are particularly appropriate) that you want to hold for the long term, preferably five to ten years or longer.

3. At regular intervals, weekly, monthly or quarterly, invest that money into the security.