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Dollar-Cost Averaging: Slow and Steady
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You don't have to be a math wizard to benefit from dollar-cost averaging. All you have to do is invest the same amount of money each and every month (or paycheck).
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What's really nice is that something as simple as dollar-cost averaging may help you invest smarter. That's because with dollar-cost averaging, you wind up buying more of an investment when it's inexpensive and less when it's expensive.
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For instance, say you want to invest $900 in the ABC Fund. Over three months, the fund's price is $30, $20, and $25. If you invested all of your money right off the bat (called lump-sum investing), you'd wind up with 30 shares of the fund. However, if you invested $300 into the fund each month, you'd wind up with a total of 37 shares.
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Of course, if you knew ahead of time that the fund would fall to $20, you could have bought all of your shares then. But you can't predict the future. Dollar-cost averaging helps you get more shares without having to worry about whether prices are rising or falling.
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Another reason dollar-cost averaging is generally considered a smart strategy is that it forces you to keep investing, even if the market is dropping. Instead of being tempted to sell your investments when prices are falling, you actually buy more.
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Dollar-cost averaging, though, has its critics. Some argue that it increases overall transaction costs, doesn't protect you from timing risks, and may lead to sub-optimal performance. In most cases, these criticisms are based on comparing the outcomes of experienced investors who have a choice between investing a large sum of money at once or spreading it out over a long period of time. Most people investing for retirement through their employer's plan can't invest all at once and instead have to make regular contributions through their paychecks.
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