Dollar Cost Averaging

There is so much risk when investing. There is always the possibility to lose all your money. That is why it is important to reduce this risk as much as possible. One key strategy is Dollar Cost Averaging.

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Definition

What is dollar cost averaging? It is a strategy that helps you reduce the risk of investing by dividing up the amount to be invested across periodic purchases.

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Benefits

Dollar Cost Averaging reduces the risk of investing at poor timing. If an investor had invested all their money at once, then there is a chance of it being poor timing. That is why Dollar Cost Averaging is useful since you can periodically invest. You will get an average of the profit or loss instead of the chance of having a major loss with all your money.

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Example

Use the picture as an example. If you are planning to invest with $12,000, you can apply dollar cost averaging and only invest $1,000 per month.

Another common use of Dollar Cost Averaging is in 401(k) plans. This is because periodically money is invested.