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Published: Feb 10, 2023 11 min read

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Dollar-Cost Averaging

Definition

Dollar-cost averaging is a strategy in which investors purchase stocks, bonds, or mutual funds on a regular schedule, regardless of stock prices. Dollar-cost averaging can eliminate the risks inherent in timing the market or waiting to buy only when stock prices are low.

Also known as:Unit cost averaging, incremental trading or cost average effect
First Seen:Dollar-cost averaging was coined by economist Benjamin Graham in his 1949 book, The Intelligent Investor.

Volatility is a natural part of investing, and every investor must contend with inevitable price fluctuations. However, investors may struggle to invest in bear markets and market downturns due to risk aversion. One of the best ways to approach investing without getting worried about volatility is through dollar-cost averaging (DCA).

What is dollar-cost averaging?

Dollar-cost averaging involves spreading your investment over time and at regular intervals, regardless of which direction the market or a particular investment is going in. When you employ this strategy, you invest equal installments of money into the market without focusing on the price of the stock, security or fund or the overall volatility of the market. This approach eliminates the risk of timing the market and can encourage a healthier approach to investment management.

How dollar-cost averaging works

With dollar-cost averaging, you decide which securities you want to purchase and the amount you wish to invest each month, biweekly or at a different chosen interval. The goal isn’t to time the market and invest when prices are high or low but to keep your investment steady and strengthen your position over time.

If you have a 401(k) account, you're already practicing DCA by taking money from each paycheck throughout the year and investing it in the market on a regular, fixed schedule, regardless of market conditions.