Dollar Cost Averaging
- Dollar-cost averaging is a big term for a fairly simple concept. It happens automatically when someone invests a set amount of money in stocks or stock mutual funds on regular intervals.
- For example, if you are investing $60 each month in stocks or stock mutual funds, during the year the prices of the stocks and mutual funds will go up and down.
- When the price is down, your regular $60 investment in stocks buys you more shares. When the price is up, $60 buys you fewer shares.This is dollar-cost averaging.
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Other examples of dollar-cost averaging:
When you leave your money in a mutual fund over time, reinvesting all of the dividends, you are also dollar-cost averaging.
- If you are participating in a 401(k) or other payroll deduction investment plan, you are dollar-cost averaging with each payroll deduction.
- You have a choice of whether to invest it all at once, or to dollar-cost average by investing part of the lump sum over 12 months.
- Dollar-cost averaging can be a way to limit the risk that you invest in a fund or funds just before the price drops.
