Should I use dollar cost averaging?

Save, Invest, Give

In this episode, Adam Nash answers what dollar cost averaging is and if you should use it. Since 2017, Adam Nash has taught “Personal Finance for Engineers” at Stanford. He's covered topics from compensation, investing, to real estate. He’s the Former President and CEO of Wealthfront, Former Vice President of Product & Growth of Dropbox, and on the Board of Directors at Acorns. He’s currently the CEO and co-founder of Daffy, a not-for-profit community built around a new, modern platform for giving.

Dollar cost averaging is a really simple approach to investing money in the market.

If you had $10,000 to invest, a lump sum investment would put all of that money into the market all at once.

With dollar cost averaging, you break that money into different chunks that you invest one after another over time.

So you might take $10,000 and invest $1,000 a month into the market for 10 months.

Most of us are actually familiar with dollar cost averaging from our 401k accounts, because we put a little bit of money in every time we get a paycheck.

People tend to love dollar cost averaging because in general, people are scared of picking the wrong moment and the wrong price to buy an investment.

And dollar cost averaging helps make it less scary, because if you put a small amount of money in over time, well, if the market goes up, you feel good about buying at a lower price, and if the market goes down, you feel good about the fact that you didn't put all your money in when the price was high.

The problem with dollar cost averaging, however, is that financial analysis clearly shows that in most cases, in most markets, you'll be better off putting all the money to work at once rather than investing it over time.

And this is for a simple reason.

It turns out the market in general goes up more often than it goes down.

And so the risk of missing out on gains turns out to be bigger than the risk of picking the wrong day.

But if you're like most people, dollar cost averaging is a popular solution because there is a bigger mistake which is not putting your money in the market at all.

So if you wanna avoid being one of those people who has all their money sitting in cash instead of invested in the market, use dollar cost averaging to get yourself over the hump of becoming an investor and not being too afraid to dip your toes in the investment waters.

Thanks for watching.

If you liked this video, be sure to hit like or subscribe.

Or better yet, if you have questions on how to save, invest or give, be sure to ask Adam by posting a question down below.

Please note that the information contained on this page is for educational purposes only and should not be considered tax advice. Any calculations are intended to be illustrative and do not reflect all of the potential complexities of individual tax returns. To assess your specific tax situation, please consult with a tax professional.

Get your Daffy account
Simplify your giving with Daffy, the Donor-Advised Fund for You™. Easily donate to almost every US public charity, track tax-deductible contributions, and access donation receipts all in one place.
Try Daffy for free
Daffy waives all membership fees for members with less than $100 in their fund, so get started today for free!

Don’t forget to download the app

Scan the QR code to get the iPhone app

Download on the App Store.
QR code to download the app from the App Store.