Dollar-Cost Averaging Is a Great Investment Strategy, but Here’s When It Doesn’t Pay

I love the concept of dollar-cost averaging. It means you’re investing a set amount into the stock market in routine intervals regardless of the market price (ie: every two weeks, each month, etc).

For instance, if you invest 20% of your paycheck every two weeks, you’re dollar-cost averaging. You’re not buying low and selling high. You’re just consistently investing. Using the power of financial automation, set up 401K/Roth IRA deductions or bank transfers into investment accounts, and you don’t even have to think about it.

Dollar-cost averaging (DCA) is an investment strategy where an investor consistently invests a fixed amount of money at regular intervals, regardless of the asset’s price. This approach aims to reduce the impact of market volatility on an investment.

1. Consistent Investments: Instead of making a lump-sum investment, the investor invests a fixed amount of money regularly, such as monthly or quarterly.
2. Market Fluctuations: As asset prices fluctuate over time, the fixed investment amount buys more shares when prices are low and fewer shares when prices are high.
3. Averaging Out Costs: The strategy aims to average out the overall cost per share over time, potentially lowering the average cost of the investment.
4. Long-Term Perspective: DCA is often used with a long-term investment horizon, allowing the investor to benefit from the potential growth of the investment over time.

DCA is considered a disciplined and risk-averse approach, helping investors avoid the challenge of trying to time the market. It is commonly used in stock market investments, mutual funds, and other types of securities. The key is consistency in investing, regardless of short-term market fluctuations.

It’s a great philosophy, but that doesn’t mean that DCA is always the smart bet.