Dollar Cost Averaging
Dollar cost averaging is an investment strategy where you invest the same amount at fixed intervals regardless of an asset’s price.
- Dollar cost averaging means that regular purchases occur regardless of the price of the financial product
- Dollar cost averaging removes the impossible task of trying to time market conditions in order to make an investment
- In market downturns when the price of your target asset drops, the dollar cost averaging strategy means you get more for the same amount of money
What is dollar cost averaging?
Dollar cost averaging is an approach you can take in your investment journey to reduce the risks from falling markets. The strategy is that you purchase more and more of a financial product with the same set amount of money at regular intervals. You continue to do so regardless of the market price of the product.
A prime example of dollar cost averaging are regular monthly contributions of a set amount into an Exchange Traded Fund (ETF) that tracks an index (i.e. the FTSE 100). In a month when the market is rising and the price of the index is up, you will be able to purchase less ETF shares for your set monthly contribution. However, in a month when the market is falling and the price of the index is down, you will be able to purchase more ETF shares.
This investment strategy is ideal for passive investors as it reduces the effort and time spent trying to estimate market conditions. In focusing on set contributions rather than the price volatility of individual purchases, investors are saved from the risks of selling due to fear when price falls and/or buying due to greed when price rises.
Where can I learn more?
For more information about dollar cost averaging, and other key financial concepts, check out our full course page. To learn more about investing, our helpful courses will take you through everything you need to know about stocks and investing.
Invezz is a place where people can find reliable, unbiased information about finance, trading, and investing – but we do not offer financial advice and users should always carry out their own research. The assets covered on this website, including stocks, cryptocurrencies, and commodities can be highly volatile and new investors often lose money. Success in the financial markets is not guaranteed, and users should never invest more than they can afford to lose. You should consider your own personal circumstances and take the time to explore all your options before making any investment. Read our risk disclaimer >