Dollar-cost averaging (DCA)
InvestingDefinition
The practice of investing a fixed dollar amount on a regular schedule regardless of what the market is doing. When prices are high, your fixed dollar buys fewer shares. When prices are low, it buys more. Over time your average cost per share ends up lower than the average price during the period.
The real benefit of DCA is behavioral, not mathematical. It removes the temptation to time the market and keeps you investing through scary drops (which is exactly when you should be buying). Your 401(k) contribution out of every paycheck is DCA in action.
The real benefit of DCA is behavioral, not mathematical. It removes the temptation to time the market and keeps you investing through scary drops (which is exactly when you should be buying). Your 401(k) contribution out of every paycheck is DCA in action.
Example
You invest $500 per month in an index fund. In Month 1 the fund is $50 per share, so you buy 10 shares. In Month 2 it drops to $25, so $500 buys you 20 shares. Your average price paid is $33, while the average of the two prices was $37.50. You got a lower effective entry price just from being consistent.
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