What is dollar-cost averaging?

Investing in the stock market can be daunting for the uninitiated. Enter dollar-cost averaging — an investing technique where you invest in the market by contributing a set amount on a regular schedule — which takes the guess work out of timing the market and can help you save for your future.

Investing for everyone

What is dollar cost averaging? It’s pretty simple, actually. Let’s say for example you start with a modest sum of money — say $100. (Possibly even less — many firms will let you set up an automatic investing plan for as little as $50 a month.) You use that money to buy as many shares of a given stock, bond or mutual fund as you can. The next month, you do the same. You may be able to automatically deduct the amount from your bank account each month, so you won’t even have to think about it.

How it works

Over time, the $100 monthly investment purchase will start to add up. The price of each investment may rise and fall, meaning your monthly purchase will buy fewer shares in some months, and more in others. But over time, your average share price could actually be lower than if you had invested a large sum all at once — and because you’re spreading your investments over time, you don’t have to be concerned about market timing. You can always increase your monthly stock purchase if your finances allow it. But even if you keep your monthly purchase the same, your portfolio can grow — especially if you invest consistently over a long period of time.

Stick with it

Stick with it and you could watch your initial, modest investment grow into something much more substantial. Of course, all investments have risk, and dollar-cost averaging can’t guarantee a profit or prevent losses in declining and volatile markets. But for those new to the markets, or those with a limited budget, it may be a great way to enter the investing arena.