Dollar-cost averaging is a strategy that serves as the financial world’s equivalent of “slow and steady wins the race.” When clients choose to invest in the market, the fear of “timing the market” perfectly can be a significant source of stress. The concern about investing a large sum of money at the wrong time—just before a market downturn, for instance—can deter many from investing altogether. That’s where dollar-cost averaging comes into play, offering a methodical and emotion-neutral approach to investing.
This strategy involves investing a fixed amount of money at regular intervals, regardless of the market’s condition. By doing so, investors buy more shares when prices are low and fewer shares when prices are high, averaging out the cost of their investments over time. This method not only simplifies the investment process but also mitigates the risk of investing a large sum in an unfavorably timed market.
An example of how dollar-cost averaging works can clarify its benefits. Imagine investing $100 monthly into a mutual fund. In a month where the fund’s shares are priced at $10, your $100 buys 10 shares. If the next month the share price drops to $5, the same $100 investment buys you 20 shares. Over time, this strategy can lower the average cost per share you pay, potentially leading to better investment outcomes as markets fluctuate. Let’s explore more about dollar-cost averaging in the infographic below:
