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Concept

Dollar-Cost Averaging

Dollar-cost averaging is investing a fixed amount of money at regular intervals, regardless of the current price, so that the timing decision is made once in advance instead of every time you invest.

The question that stalls most new investors is "is now a good time?" Nobody can answer it reliably, professionals included. In The Intelligent Investor, Benjamin Graham's advice to the defensive investor was to stop asking. You put the same sum into your chosen investments every month or quarter, wherever prices happen to stand. There is also a mechanical side effect. A fixed amount buys more shares when prices are low and fewer when they are high, so your average cost per share lands below the average price over the period. Be clear about what it isn't. If you already hold a large lump sum, investing it all at once has historically come out ahead more often than not, because markets rise more often than they fall. Dollar-cost averaging's real edge is behavioural: it turns a fresh, nervous decision into a standing rule you set while calm.

A real-life example

Maya sets up $300 to go into an index fund on the 1st of each month. In month one the fund costs $50, so she gets 6 units. In month two it drops to $40, and the same $300 buys 7.5. In month three it climbs to $60 and buys 5. She now owns 18.5 units for $900. That works out to about $48.65 each, below the $50 average price, and she never had to guess.

How to use it

  1. 1Pick the amount and the date: a sum you can keep investing through bad months, scheduled for a day or two after payday.
  2. 2Automate it with a standing order or automatic investment plan, so skipping takes effort and continuing takes none.
  3. 3Write down the one condition under which you would change the plan, such as a change in your income rather than in the headlines, and otherwise leave it running.