Dollar-Cost Averaging: More Shares @ a Lower Price?

We all know that investing is always risky. But in crazy markets such as the one we’re in now, it’s as risky as ever.

So, what can you do to cut down on risk while still being invested in the market?

Well, one thing you can do is use an investing strategy called Dollar-Cost Averaging.

With Dollar-Cost Averaging, you invest a fixed amount of money in a certain stock or fund at regular intervals. This way, when your stock/fund goes up in price, you’ll buy fewer shares. But when it goes down in price, you’ll buy more shares. The idea is that over time, you’ll own more shares and you’ll pay a lower average price per share.

This will help you reduce the risk of investing by letting you accumulate shares at a lower average price while also taking the emotion out of investing.

Here’s an example of the difference between Dollar-Cost Averaging and a one-time lump sum investment in the same mutual fund. Both investors have $1200 to invest. The lump-sum investor buys $1200 in shares of a mutual fund on Jan. 1. The Dollar-Cost Averaging investor invests $100 in the same mutual fund on the first day of each month of the year.

Source: Charles Schwab

In this example, the Dollar-Cost Averaging Investor bought more shares at a lower per share price than the Lump-Sum Investor. As you can see, this Dollar-Cost Averaging strategy can be pretty beneficial in a volatile market like we’re in now. So, what do you think? Is Dollar-Cost Averaging something that you’ll consider? Let us know.