Dollar-cost averaging means investing the same amount on the same schedule, whatever the market does, so you never have to decide whether today is a good day to buy. Set up automatic investments from every paycheck, and keep them running through market drops, when each dollar buys more shares.
The hardest part of investing is deciding when to buy. When prices are climbing, it feels too late. When they’re falling, it feels too early. Either way, the cash sits.
Dollar-cost averaging takes that decision away. You invest a fixed amount on a fixed schedule, so the calendar decides when you buy, not the headlines. At $50 a share, $500 buys 10 shares. After a drop to $25, the same $500 buys 20, with no judgment call either way.
What it doesn’t do is earn you more. If you already have a lump sum, investing it all at once has usually come out ahead. Vanguard’s research found that a lump sum beat splitting it over three months about two-thirds of the time in market data from 1976 to 2022, because stocks outperform cash in most periods.
The case for dollar-cost averaging is behavioral. FINRA says a fixed schedule can take some of the emotion out of investing and help you avoid impulsive moves. If you contribute to a 401(k) from each paycheck, you’re already doing it.
Put the rest of your investing on the same schedule. Set up automatic transfers into your IRA or brokerage account on payday, along with automatic purchases of the funds you’ve chosen, so no single buy depends on your mood that day.
With a windfall, invest it at once if you can live with a drop the next week. If fear would leave it in cash, split it into three equal purchases a month apart and put the dates on your calendar. In the same Vanguard data, that split beat staying in cash 69% of the time.
Set the amount and the schedule once, and don’t pause it when prices fall. Those are the purchases that buy the most shares.
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