What Is Dollar-Cost-Averaging: Is It the Best Way to Invest?

Want excellent investment advice? Buy low, sell high. This desirable but overly simplified strategy means you should buy shares at a low price and sell them when they are at a higher price, resulting in a profit on the transaction.

Therein lies the rub for most investors, which is challenging to achieve. Why? Because we are busy human beings with emotional biases that react to volatile markets. When the market is in a downturn, people often fear more declines and sell their shares.

And when stocks rise, people get FOMO (fear of missing out) and may rush in to invest. For many of us, emotions and stress levels play a role in constructing our investment portfolio, making dollar-cost-averaging a legitimate strategy.

What is Dollar-Cost-Averaging?

Dollar-cost-averaging (DCA) is a systematic program of investing equal sums of money at regular intervals regardless of the investment’s price.

The DCA approach minimizes risk and is desirable for investors with low-risk tolerance. It automatically buys more shares through downturns and lower prices, decreasing the average share price.

Benefits of Dollar-Cost-Averages 1. Reduces Risk

Investors are making purchases at regular intervals and fixed amounts instead of poorly timed lump sum investments. They can set up automated contributions based on preferred parameters like they do for their retirement accounts.

2. Investor Discipline

Dollar-Cost-Averages reduce the average cost of shares purchased over a relatively long term. Investors will buy more shares at a fixed amount when the market goes down. While it doesn’t eliminate losses, this strategy limits them during times of declining prices.

3. Help You Lower Your Cost Basis

4. Less Focus on Short-Term Market Volatility

Market volatility can be stressful. DCA smooths out the volatility by regularly making lower-priced share purchases. Investors can better ignore the daily noise affecting the market.

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