Chapter 6: Investment Strategies
Dollar-cost averaging is the practice of adding money into your investments at regular intervals. For example, you may determine that you can invest $500 a month. So each month you put $500 to work, regardless of what the market is doing. Or maybe you add $125 each week instead. By regularly purchasing an investment, you’re spreading out your buy points.
Advantages: By spreading out your buy points you’re avoiding the risk of “timing the market”, meaning the risk of dumping all your money in at once. Dollar-cost averaging means you’ll get can average purchase price over time, ensuring that you’re not buying too high. Dollar-cost averaging is also good for helping to establish a regular investing discipline. Over time you’re likely to wind up with a larger portfolio, if only because you were disciplined in your approach.
Risks: While the consistent method of dollar-cost averaging helps you avoid going all-in at the wrong time, it also means you won’t go all-in at the right time.