Dollar cost averaging is the practice of investing the same amount of money at regular periodic intervals. For example, a person might invest $300 every month. It’s generally thought to be a good practice, but some call it a marketing gimmick, and others call it a losing proposition. Which is true? As with most debates, each viewpoint has some truth to it. Let’s look at each.
Why it’s a Useful Tool
The benefit of dollar cost averaging is this: by investing periodically, you’re more likely to buy shares when prices are low. The low-priced shares give you the greatest return.
As an example, let’s look at investing in a stock for which the price was $10 in month #1, rose to $15 in month #2, fell to $5 in month #3, and returned to $10 in month #4. A graph of the stock prices is shown below.
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