Dollar-Cost Averaging
Dollar-cost averaging (DCA) is an investment strategy that involves dividing up the total amount to be invested across periodic purchases of a target asset, such as stocks, bonds, or mutual funds. The goal of dollar-cost averaging is to reduce the impact of volatility on the purchase of an asset by spreading out the purchase over time. This strategy is also known as the constant dollar plan.
Dollar-cost averaging works by investing a fixed amount of money at regular intervals, regardless of the share price. This means that more shares are purchased when prices are low and fewer shares are purchased when prices are high. Over time, the average cost of the shares purchased will be lower than the average market price.
Dollar-cost averaging is a popular strategy for investors who are looking to reduce the risk of investing in volatile markets. It is also a good strategy for investors who are just starting out and don’t have a large amount of money to invest. By investing a fixed amount of money at regular intervals, investors can take advantage of market fluctuations and build a portfolio over time.
History of Dollar-Cost Averaging
The concept of dollar-cost averaging was first introduced in the 1950s by financial advisor Paul Samuelson. Samuelson argued that investors should invest a fixed amount of money at regular intervals, regardless of the market conditions. He argued that this strategy would reduce the risk of investing in volatile markets and would help investors to build a portfolio over time.
Since then, dollar-cost averaging has become a popular strategy for investors who are looking to reduce the risk of investing in volatile markets. It is also a good strategy for investors who are just starting out and don’t have a large amount of money to invest. By investing a fixed amount of money at regular intervals, investors can take advantage of market fluctuations and build a portfolio over time.
Comparison Table
| Strategy | Risk | Return |
|---|---|---|
| Dollar-Cost Averaging | Low | Moderate |
| Lump-Sum Investing | High | High |
Summary
Dollar-cost averaging is an investment strategy that involves dividing up the total amount to be invested across periodic purchases of a target asset, such as stocks, bonds, or mutual funds. The goal of dollar-cost averaging is to reduce the impact of volatility on the purchase of an asset by spreading out the purchase over time. This strategy is also known as the constant dollar plan. Dollar-cost averaging is a popular strategy for investors who are looking to reduce the risk of investing in volatile markets. It is also a good strategy for investors who are just starting out and don’t have a large amount of money to invest. For more information about dollar-cost averaging, you can visit websites such as Investopedia, The Balance, and Morningstar.
See Also
- Lump-Sum Investing
- Asset Allocation
- Rebalancing
- Portfolio Diversification
- Risk Tolerance
- Time Horizon
- Investment Horizon
- Investment Risk
- Investment Return
- Investment Strategy
