Read Aloud the Text Content

This audio was created by Woord's Text to Speech service by content creators from all around the world.

Text Content or SSML code:

What Is Dollar-Cost Averaging? Investing can be challenging. Even experienced investors who try to time the market to buy at the most opportune moments can come up short. Dollar-cost averaging is a strategy that can make it easier to deal with uncertain markets by making purchases automatic. It also supports an investor's effort to invest regularly. Dollar-cost averaging involves investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price. By using dollar-cost averaging, investors may lower their average cost per share and reduce the impact of volatility on the their portfolios. In effect, this strategy eliminates the effort required to attempt to time the market to buy at the best prices. Dollar-cost averaging is also known as the constant dollar plan. Key takeaways: 1 Dollar-cost averaging is the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of a security. 2 Dollar-cost averaging can reduce the overall impact of price volatility and lower the average cost per share. 3 By buying regularly in up and down markets, investors buy more shares at lower prices and fewer shares at higher prices. 4 Dollar-cost averaging aims to prevent a poorly timed lump sum investment at a potentially higher price. 5 Beginning and long-time investors can both benefit from dollar-cost averaging. How Dollar-Cost Averaging Works Dollar-cost averaging is a simple tool that an investor can use to build savings and wealth over the long term. It is also a way for an investor to ignore short-term volatility in the broader markets. A prime example of long-term dollar-cost averaging is its use in 401(k) plans, in which employees invest regularly regardless of the price of the investment. With a 401(k) plan, employees can choose the amount they wish to contribute as well as those investments offered by the plan in which to invest. Then, investments are made automatically every pay period. Depending on the markets, employees might see a larger or smaller number securities added to their accounts. Dollar-cost averaging can also be used outside of 401(k) plans. For instance, investors can use it to make regular purchases of mutual or index funds, whether in another tax-advantaged account such as a traditional IRA or a taxable brokerage account. Dollar-cost averaging is one of the best strategies for beginning investors looking to trade ETFs. Additionally, many dividend reinvestment plans allow investors to dollar-cost average by making purchases regularly.