Yes, dollar-cost averaging is a basic tenet of investing, typically used to invest lump sums of cash (e.g., inheritances) or ongoing systematic cash investments. Rather than moving a large amount of cash into the market all at once (and risk losing a large percentage the next day if the markets turn quickly), an investor would decide on an interval of time (e.g., 24 months) and move an equal amount of monies into the market over that time period. This rationale not only offers risk protection from a significant downturn (note that the protection is for those that have only been investing for a short time, not those that have been invested for a long time) but also allows new monies that continue to be invested to be bought very cheaply. Americans with 401(k)s, 403(b)s and other retirement plans already use a form of dollar-cost-averaging when they make their savings decisions at the beginning of each year and purchase set amounts monthly. When investors, already in the market, move their monies to another broker, dollar-costaveraging is generally not used because they are just making a “lateral” move; that is, stocks to different stocks. In current times like these, with very cheap prices, investors may consider “doubling up” on their investment schedule and purchase more, if their risk tolerance and retirement horizon allow for it.

Dollar-cost averaging is one of several basics of investing. Probably the biggest benefits of this particular method is that it eliminates the worry about trying to “time the market” and is an affordable and consistent way to invest. The theory with dollarcost averaging is that you buy shares when the market is up and when it is down so that ultimately over time you are purchasing shares at the best prices possible. A good example of dollar-cost averaging is investing in your 401(k), where a specific amount is withheld from your paycheck on a regular basis and invested as you have requested. While this works in some circumstances, there are numerous studies that suggest that lump-sum investing actually produces better returns over time, particularly if you have large sums of money to invest. The theory behind this type of investment strategy is that you have your money in the market longer and consequently your returns will be better over the long run. As with any investment option, no one strategy is best, but perhaps a combination of many strategies allows the investor to have the best diversification.

Dollar-cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts. Many successful investors already practice dollar-cost averaging without realizing it. Many others could save themselves a lot of time, effort and money by beginning a plan. The result of dollar-cost averaging is that more shares are purchased when the price is low and fewer shares are purchased during periods of higher prices. In the end, the average cost per share should be lower than the average share price. By investing through dollar-cost averaging, the investor lessens the risk of making a lump sum purchase at an inopportune time. Many people are already dollar-cost averaging through their retirement plans. When you have money deducted from every paycheck and deposited to your 401(k) or 403(b), this is an example of a DCA plan. For example, let’s say you use dollar-cost averaging and invest $200 a month in a mutual fund called the XYZ Fund. Here’s what could happen: In January, XYZ Fund is at $10 per share. So your $200 investment buys 20 shares this month; the price of XYZ Fund drops to $8 per share in February. Your $200 buys 25 shares this month; the price of XYZ Fund rises to $12.50 in March. Your $200 buys 16 shares this month. Over these three months you buy 61 shares for $600. Although the average price per share is $10.17 ($10 + $8 + $12.50, divided by three), you paid an average of only $9.84 per share ($600 divided by 61). This is even when you purchased shares as high as $12.50 per share. In today’s volatile market this is a great strategy to employ, as you are buying shares at many different points in the market as it goes up and down giving you an average cost. Will dollar-cost averaging guarantee you a profit? No system can do that. But if you buy quality investments and continue dollar-cost averaging over a long period, you will have a much better chance of success than trying to get in and out of the market at the right times.

Dollar-cost averaging is very effective when investing in financial markets. If you have a 401(k), 403(b), etc., you are dollar-cost averaging by deferring a portion of your monthly pay into your retirement plan. The financial markets have ups and downs and by dollar-cost averaging you reduce your risk by investing at different price points. I would also like to point out this is the best way to withdraw money as well. If you would like to learn more about dollar-cost averaging check out the definition at Wikipedia.