Dollar Cost Averaging (DCA) is a method for reducing your costs as you make regular investments over a long period. By investing the same number of dollars regardless of market prices, you automatically reduce your average price per share.
Consider this simple example: You decide to invest $100 on the same day every month in a fund that tracks the Standard & Poor’s 500 Index. When the index price is relatively low, your $100 will buy a few more shares; when the index price is relatively high, your $100 will buy fewer shares.
Over time, DCA forces you to automatically buy more shares when prices are low and fewer shares when prices are high. You’ll never have to decide whether you’re at a high point in the market or a low point. The math will do that for you. And your average cost per share will be lower than the average of all the prices at which you bought.
If you have money regularly taken from your pay to fund a 401(k) or similar plan, you’re already using DCA. This technique does not guarantee that you’ll ever make a profit on your investments. But it will give you a price break, so to speak.
Just as important, DCA gives you a plan. Having a plan leads to a greater success rate in any endeavor. And in this case, the plan is simple and easy: Determine how much you’ll invest, how often you’ll invest it, and what you’ll buy with your investments. Then set it up and let it work for you.