Textbook definition:
Dollar-cost averaging (DCA) is when an investor puts the same amount of money into their investments every month rather than depositing a large sum once.
What that means:
There are two common ways to invest: deposit a lump sum of money at one time or invest the same amount of cash at the same time each month. While the lump sum allows you to put more into the market at once, it can also subject your dollars to more risk. If stocks decline the day after you invest $12,000, then you’ll lose a lot more than if you put $1,000 in that month. (Bear in mind, the opposite is also true: You could make a large gain if the markets rise after a big deposit, but look at any stock chart and you’ll see that shares rarely climb in a straight line over time.) Another advantage: If the stock is down one month, then you’ll end up buying more shares in that company, which could pay off when its price rebounds. If you put in the lump sum and that’s it, then you won’t benefit from any market dips. DCA also gets you into the habit of saving money every month, which can be an excellent way to build your investing confidence. Otherwise, you may panic at the end of the year and throw any money you have left into an account — if you have anything left.
10-second take:
Investors have been dollar-cost averaging for decades. Why? Because it builds great savings habits and can help reduce market volatility risk.
