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A Dive into Dollar Cost Averaging

What is Dollar Cost Averaging?

Dollar cost averaging is an investment strategy in which the investor consistently invests money into a security over set time intervals. The aim of this strategy is to "average into" a position; because the time periods in which the investor invests more into the position are consistent, the main draw of this strategy is that the investor will buy both the high points and the low points of the asset, in effect, averaging out.

 

What are the Benefits of the Strategy?

This investment strategy is one of the longest-standing strategies there is for investors to participate in the financial markets; this is for a reason: the strategy can yield great benefits. One main benefit of the strategy is the idea that the investor could end up with more shares of a security for the same price by using dollar cost averaging instead of buying all of the shares at once. For example, if a security is trading at a price of $40, and the investor decides to invest $400 all at once, then the investor will get 10 shares. However, if the investor chooses to invest using the dollar cost averaging strategy and invests $100 per week, a scenario like this may follow:

Week 1 - the security drops to $20, and the investor buys 5 shares

Week 2 - the security increases to $25, and the investor buys 4 shares

Week 3 - the security increases to $50, and the investor buys 2 shares

Week 4 - the security drops back down to $40, and the investor buys 2.5 shares (assuming fractional trading)


As a result, the investor is able to purchase 13.5 shares of the security using the dollar-cost averaging method, instead of the 10 shares purchased by investing the $400 all at once.


 

Sources

https://intelligent.schwab.com/article/dollar-cost-averaging


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