How to use dollar-cost averaging

A "hack" to take the emotion out of investing.

Investing can be intimidating. Timing the market is hard, especially when you’re a beginner. How do you know the right time to buy and sell a stock? Plus, investing a large amount of money up front can put a strain on your finances. And what’s all this talk you hear about psychological biases???

Dollar-cost averaging is an investment strategy that takes some of the pressure off. In this blog, we’ll help you decide if dollar-cost averaging is right for you by showing you how it works in different market conditions and laying out the pros and cons.?

Let’s jump right into it!

What is dollar-cost averaging?

Dollar-cost averaging means breaking up one investment into smaller, consistent investments spread out over time. Instead of purchasing a lot of shares at once,?you buy smaller amounts of shares ?at regular intervals, regardless of price.

The amount of money you invest stays the same every time, but the number of shares you can buy will change as the market changes (thanks?fractional investing! ). Buying shares at a range of different prices –?instead of timing the market ?– will ideally result in a lower average price per share over time.?

The basic idea is to build wealth?over the long term ?and minimize the impact of the ups and downs in the market (a.k.a. market volatility).

Dollar-cost averaging can be powerful during recessions and?bear markets ?because low prices mean you’re able to purchase more shares. Since dollar-cost averaging is a long-term investment strategy, the prevailing theory is that?shares bought low will have time to grow in value as the market trends upward . (Stay tuned for an example of how this works!)?

This strategy can also?prevent emotion from undermining your portfolio , so you can invest in down markets with much less stress. For example, you’d probably feel more regret about a poorly-timed trade if you invested a large amount of money at once rather than just a little. Also, by sticking to your regular investment intervals, the question of?when?to buy shares is removed from the equation.

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