Glossary
Dollar-Cost Averaging
Investing a fixed dollar amount at regular intervals regardless of price, so more shares are bought when prices are low.
Dollar-cost averaging means investing the same amount of money on a fixed schedule, such as $500 on the first of every month, whatever the market is doing. Because the dollar amount is fixed, it buys more shares when prices are low and fewer when they are high. Most people already do it without the label through regular 401(k) contributions from each paycheck.
How the math works
That average cost is always at or below the simple average of the purchase prices; the gap grows with how much prices swing.
What it is good for
The main benefit is behavioral. A fixed plan takes the guesswork out of when to buy, keeps money going in during scary declines, and limits the regret of investing a lump sum just before a crash. It fits naturally with saving from income.
What it does not do
Dollar-cost averaging does not guarantee a profit or protect against loss in a market that keeps falling. And when you already have a lump sum to invest, studies of historical US returns generally find that investing it all at once has beaten spreading it out more often than not, simply because markets rise more often than they fall and the money spends more time invested. Spreading it out trades some expected return for less regret and a smoother start. Which matters more is a personal choice.
Fees can also eat into the approach if each small purchase carries a commission, though most US brokers now charge none for stock and ETF trades.