What is dollar cost averaging, and what does it do?
Dollar cost averaging is the process of buying mutual fund shares or stocks at regular intervals (usually monthly, quarterly or annually) in a fixed dollar amount. This means that your average share price is less than the average price over the period. Because you are buying a fixed dollar amount, you buy more shares when prices are cheaper, and fewer shares when they are more expensive. For example, let’s say you buy $100 worth of mutual fund shares per month. The first month, the price is $10 per share, and you buy 10 shares. The second month, the price drops to $5 per share, and you buy 20 shares. The third month, the price goes to $15 dollar, and you buy 6.7 shares. By the fourth month, the price drops back to $10, where you first started buying. But, you didn’t just break even. In total, you spent $300 dollars to buy 36.7 shares, which are now worth $367. This ability to smooth out the bumps in the market makes dollar cost averaging a great way to begin investing. Many mutual fund
