Education & Tools

Dollar-Cost Averaging

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Automatic investment plans do not assure a profit and do not protect against loss in declining markets.

Timing is everything. Just ask any investor who has bought at the high point of a stock market or sold at the bottom.

If professional money managers make the same mistakes from time to time, and they do, how does an individual get around the “timing” thing?

To avoid timing errors and improve investment results in the process,many investors pursue a strategy called dollar-cost averaging. Instead of trying to time the highs and lows of the market, simply invest equal amounts of money at regular intervals. When prices are up, you’ll buy fewer shares; when prices are down, you’ll buy more.

By buying fewer shares when the price is high, you decrease your risk of losses should prices fall. By buying more shares when the price is low, you increase your opportunity for profits when prices rise.

By allocating your investment dollars evenly over time, you avoid the risk of putting too many eggs into one or more baskets at the same time. This is often a hidden risk for IRA investors who postpone making their yearly contribution until the last minute and must invest a lump sum at whatever price the market happens to have reached.