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.
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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.