Dollar Cost Averaging: The Simple Investing Strategy That Works

Many times we investors make investing much harder than it needs to be. We spend countless hours researching trying to find the next Apple or Amazon. In reality, we could just deploy a simple dollar cost averaging strategy, save time and earn a nice return on our money.

In this post, I am going to walk you through how to set up a dollar cost averaging strategy and show you how it works to make you money in the long run.

What Is Dollar Cost Averaging?

Dollar cost averaging is taking a set amount of money on a regular basis and investing it into the market, regardless of how the market is performing. You can determine how frequently you want to invest – be it monthly, bi-monthly, whatever. The point is, you regularly invest money into the stock market.

This strategy works by taking your emotion out of investing. Too many times we buy at the top of the market and sell at the bottom. This results in poor returns on our money.

By investing on a regular basis regardless of what the market is doing, you are always buying. Yes, you will be buying at the market tops, but you also will be buying at the bottom too. And when the market turns around, you are going to see a nice gain on those purchases.

Let’s walk through a quick example of dollar cost averaging. You buy $100 worth of a mutual fund each month for a year. Below you see how many shares you buy each month along with the price of the mutual fund and your ending balance.

As you can see, you ended up with $1,214 at the end of the year. This resulted in your earning $14 on your investment. Take note to the right hand column and see how you bought more shares when the share price was low and fewer shares when the price was high. This is exactly how you make money investing, buying low.

Now, what if you had invested in all of your money at once?

Dollar Cost Averaging Versus Lump Sum

The big debate that rages on when people come into a windfall of money is whether they should invest the money all at once or use a dollar cost averaging strategy. There are advantages and disadvantages to each.