Trading
Dollar-Cost Averaging
Instead of trying to time the market, a dollar-cost averaging investor buys steadily, say the same amount each month. When prices are low the fixed sum buys more shares, and when prices are high it buys fewer.
The approach removes emotion and reduces the risk of committing everything at a market peak. Over time it produces an average purchase price that can be lower than trying, and failing, to buy the bottom.
Dollar-cost averaging is popular for retirement accounts and long-term investing precisely because it turns a difficult timing problem into a simple, repeatable habit.
Example
Investing $500 in an index fund on the first of every month, no matter the price, is dollar-cost averaging.
Dollar-Cost Averaging — FAQ
What is Dollar-Cost Averaging?
Dollar-cost averaging is the practice of investing a fixed amount at regular intervals regardless of price, smoothing out the effect of market volatility over time.
Can you give an example of Dollar-Cost Averaging?
Investing $500 in an index fund on the first of every month, no matter the price, is dollar-cost averaging.
Understanding creates conviction.
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