Dollar Cost Averaging - Is it a Smart Strategy?

Dollar Cost Averaging - Is it a Smart Strategy

When it comes to investing, there are a lot of different strategies that people use in order to try and make the most money. One popular strategy is called dollar cost averaging. But what exactly is dollar cost averaging? And is it a smart strategy to use? Keep reading to find out. 

Dollar cost averaging is an investing strategy where you invest a fixed sum of money into a security or securities at fixed intervals. The goal of this strategy is to reduce the effects that short-term fluctuations might have on your overall investment. 

For example, let's say that you want to invest $100 into Company XYZ stock. You could either invest the entire $100 at once, or you could spread it out and invest $10 at a time over 10 weeks. By investing $10 at a time, you're using the dollar cost averaging strategy. 

The thought behind this strategy is that by buying small amounts over time, you'll be able to average out your purchase price. So, if the stock price goes down one week, you'll be buying more shares for your $10 investment than you would have if the stock price had stayed the same or gone up. Then, when (or if) the stock price goes back up again, your average purchase price will be lower than it would have been if you had just invested everything at once. 

There are pros and cons to using the dollar cost averaging investing strategy. One pro is that it takes the emotions out of investing since you're buying small amounts over time instead of investing everything all at once and then watching nervously as the stock price fluctuates. A con is that it usually costs more in commissions to set up dollar cost averaging since you'll be making more transactions. 

Ultimately, whether or not dollar cost averaging is a smart strategy for you depends on your individual circumstances and goals. If you're someone who gets emotional about watching their investments go up and down, then this might be a good strategy for you to use. Just make sure to factor in any additional costs associated with setting up this type of investment plan before making your final decision.