You can invest like an expert with one simple strategy

Having an investment strategy that takes your budget, long-term financial goals and risk-tolerance into consideration is key to helping your money grow and staying the course when the market becomes volatile.  

What is dollar-cost averaging?   

One strategy investors use to mitigate risk is dollar-cost averaging. This involves making investments of equal amounts, at regular intervals, regardless of how the stock market is performing.  

Dollar-cost averaging is a more conservative approach to the age-old advice that investors should buy when share prices are low and re-sell them when they’ve gone up in price.  

The problem with this buy-low-sell-high approach: The stock market is unpredictable and trying to nail down the best time to buy or sell, and you could lose out on some potential returns.  

“It is difficult to time the market,” says Walter Todd, president and CIO of Greenwood Capital. “Dollar-cost averaging is a good way to get started investing and provides a disciplined approach to putting money to work in the market.” 

How does dollar-cost averaging work?  

Start by deciding how much you can afford to invest in the same stock or mutual fund. Then you’ll need to determine how often you want to make these investments. 

These investments can be made weekly, bi-weekly, monthly, or even quarterly. It’s up to you to decide how much you can comfortably afford to invest and how often. After that, you can open a brokerage account and set it to automatically start investing based on your choices. If automating your investments isn’t an option, you can still manually make those purchases through your account.

If you’re saving money for retirement in a 401(k) account, you’re already participating in a form of dollar-cost averaging by investing a set portion of your paycheck each pay period.

Dollar-cost averaging in action  

Say you want to invest $100 per month in ABC stock, regardless of the price. The share price will go up and down each month, so some months you’ll be able to buy more shares.

As the chart above shows, you will have invested $600 at the end of six months, for a total of 126.6 shares, at an average price of $6 per share. 

Now let’s take an example showing how your portfolio would come together if you had invested that same $600 in one lump sum, rather than spreading out your investments over time using dollar-cost averaging. 

By investing all your money at once, you run the risk of paying a higher price per share and missing out on the opportunity to buy more shares.  

“[Dollar-cost averaging] is based on the idea that it is difficult to time the market and waiting to accrue a large lump sum of money to invest in the market could result in an opportunity cost of being out of the market or putting the lump-sum in at exactly the wrong time,” says Todd. “Dollar-cost averaging allows investors to spread their risk over time.” 

These are, of course, simplified examples. But this gives you an idea of the how impactful dollar-cost-averaging can be.

The pros and cons of dollar-cost averaging  

Dollar-cost averaging isn’t for every kind of investor, but a major upside is it can be a low-cost way to start investing and give your money the chance to begin compounding over time. This can be especially beneficial for younger investors who don’t have as much money saved or more risk-averse investors who may choose to not invest at all because they’re waiting on the “right time” to invest.   

Another pro: This strategy takes the emotion out of investing. Whether the market is working for or against your investments, dollar-cost averaging forces the investor to stay the course and invest a certain amount each week, month, or quarter.  

It’s important to keep in mind that investing at smaller intervals isn’t a zero-risk strategy. While there may be periods when you can purchase shares at a lower price, there will likely be periods when you miss out on larger returns by sticking to this more conservative approach. Investing at regular intervals can also mean paying frequent transaction fees. Be sure to ask your brokerage about any fees associated with your account. 

The takeaway   

Investing will always involve some level of risk—it’s up to you to determine how you want to manage it. Dollar-cost averaging can be one way of ensuring that you don’t miss out on potential gains, while still minimizing the risk of investing a lot of money all at once.  

“Dollar-cost averaging is a disciplined process,” says Todd. “If followed correctly, it forces investors to consistently put money to work in the market even in times when it feels like you might not want to invest.”