Dollar-Cost Averaging

Definition

Dollar-cost averaging means you invest a set amount every month or quarter automatically, whether markets are up, down, or sideways. You buy more shares when prices are low and fewer shares when prices are high, but you don't have to think about timing. It removes emotion from the equation because you're following a mechanical system.

Why it matters

Most people avoid investing after big market drops because they think prices will go lower. Dollar-cost averaging forces you to do the opposite: you automatically invest more when stocks are cheaper. This psychological trick usually works out well over time. A person who invested $500 monthly for 20 years through every bear market and bull market would have invested $120,000 and likely ended up with $300,000+, depending on returns.

Quick example

You commit to investing $400 monthly into a broad fund. When the market crashes and the fund is cheap, your $400 buys more shares. When the market is expensive, your $400 buys fewer shares. Over time, you accumulate a lot of shares at varying prices, which reduces the impact of bad timing. Doing this through automated payroll deduction makes it effortless.

The bottom line

Knowing what Dollar-Cost Averaging means helps you make better day-to-day money decisions. It makes rates, account options, and tradeoffs easier to compare.