Does Dollar-Cost Averaging Really Work?
Dollar-cost averaging is investing a fixed amount of money at regular intervals. Believe it or not, dollar-cost averaging is probably one of the most common investing strategies investors use. But not for the reason you may have heard.
Theory versus fact
The original idea behind dollar-cost averaging is that your fixed monthly payment buys more shares of an investment when the price is down, and fewer shares when the price is high. The theory was that this process results in your paying less than the average price for the shares over time. Unfortunately, the theory works only when there are more down periods than up periods in share prices, which historically hasn’t been the case.
So why is dollar-cost averaging still a sound investment strategy? In short, because it helps enforce disciplined savings, which is a good foundation for successful investing.
Consider that dollar-cost averaging:
- Puts your investing on autopilot, making it easy to stick with your plan.
- Eliminates concerns over market fluctuation and when to invest.
- Helps you avoid jumping in and out of the market — such as buying when prices are high or selling when prices are low.
Dollar cost averaging does not guarantee a profit nor protect you from loss during a declining market. You should consider your overall investment objectives and your ability to continue investing throughout various market cycles before beginning this or any investment program.
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