Dollar Cost Averaging

One of the first-taught mantras of investing is to buy low and sell high. In doing so, an investor can realize the greatest appreciation from their purchases. The problem is that it is impossible to accurately and consistently identify market troughs and peaks. So, this begs the question: how can one most efficiently deploy their funds into the market?

Clearly there is no fail-safe method, but utilizing a system of dollar cost averaging can help investors achieve more stable prices by reducing sensitivity to the timeliness of trades.

BusinessDictionary.com defines dollar cost averaging in the following way:

"An investment strategy that seeks to minimize risk by reducing the average cost per share. Under this plan, an investor invests only a fixed amount in securities at regular intervals, regardless of the market's up or down movements."

Chances are, you already facilitate this strategy without knowing it. If you are employed have money consistently taken out of your paycheck that is automatically invested, you are dollar cost averaging.

Rather than trying to time market fluctuations, dollar cost averaging helps investors stabilize their investment's cost basis. In practice, your identical contributions will purchase less of a security when the price is high and more of the security when the price is low. Therefore, you can achieve a lower average cost for your purchases over the long-term.

Here is a nice illustration from FinanceEditor.com: