The Pros and Cons of Dollar-Cost Averaging | FINRA.org

With dollar-cost averaging, you invest your money in equal portions, at regular intervals, regardless of the ups and downs in the market. Let's ... Skiptomaincontent ForInvestors InvestorInsights EXPLORETHISSECTION FINRAMainNavigation ForInvestors InvestorInsights Tools&Calculators PersonalFinance LearntoInvest ProtectYourMoney FortheMilitary NeedHelp? Volatility TheProsandConsofDollar-CostAveraging May24,2022 Whenthinkingaboutinvesting,oneconsiderationiswhethertoinvestfundsallatonceoroveraperiodoftime.Ifyouchoosethelatterroute,youmightbeoptingforaninvestmentstrategycalleddollar-costaveraging. Withdollar-costaveraging,youinvestyourmoneyinequalportions,atregularintervals,regardlessoftheupsanddownsinthemarket. Let’ssayyoureceiveabonusorhavesavedup$10,000toinvest.Insteadofinvestingthatamountallatonce,withdollar-costaveragingyoumightsplitthat$10,000into10partsandinvest$1,000amonthfor10months. Youmightalreadybeengagingindollar-costaveragingandnotevenknowit.Ifyouhavea401(k)oranothertypeofdefinedcontributionplan,yourcontributionsareallocatedtooneormoreinvestmentoptionsonaregular,fixedschedule,regardlessofwhatthemarketisdoing.Everytimethishappens,you’redollar-costaveraging. Beforeyoustartdivvyingupyourmoney,herearethreethingstoknowaboutdollar-costaveraging: WhyMightSomeoneConsiderDollar-CostAveraging? Itwouldbegreatifwecouldbuystocks,orothertypesofinvestments,whenthemarketislowandsellwhenthemarketishigh.Unfortunately,effortsto"timethemarket"oftenbackfire,andinvestorsendupbuyingandsellingatthewrongtime. Whenstocksgodown,peopleoftengetfearfulandsell.Then,whenthemarketgoesbackup,theymightmissoutonpotentialgains.Ontheflipside,whenthestockmarketgoesup,investorsmightbetemptedtorushin.Buttheycouldendupbuyingjustasstocksareabouttodrop. Dollar-costaveragingcanhelptaketheemotionoutofinvesting.Itcompelsyoutocontinueinvestingthesame(orroughlythesame)amountregardlessofthemarket’sfluctuations,potentiallyhelpingyouavoidthetemptationtotimethemarket. Whenyoudollar-costaverage,youbuymoresharesofaninvestmentwhenthesharepriceislowandfewershareswhenthesharepriceishigh.Thiscanresultinpayingaloweraveragepricepershareovertime. Andbywadingin,asopposedtohandingoveryourmoneyallatonce,dollar-costaveragingcanhelpyoulimityourlossesintheeventthemarketdeclines. WhatArethePotentialDownsidesofDollar-CostAveraging? Dollar-costaveragingcanbeahelpfultoolinloweringrisk.Butinvestorswhoengageinthisinvestingstrategymayforfeitpotentiallyhigherreturns.Withdollar-costaveraging,you’reholdingontoyourmoneyascashlonger,whichhaslowerriskbutoftenproduceslowerreturnsthanlumpsuminvesting,especiallyoverlongerperiodsoftime. Ifthemarketgoesupduringaperiodwhenyou’redollar-costaveraging,youmightmissoutonthepotentialgainsyoucouldhavehad,hadyouinvestedrightawayinonefellswoop. Ofcourse,thisdoesn’tapplytosomethinglikeyour401(k)because,inthatsituation,you’reinvestingthemoneyasyouearnit,notholdingmoneyincashuntilalaterdate. Also,keepinmindthatifyouengageindollar-costaveraging,youmightencountermorebrokeragefees.Thesefeescoulderodeyourreturns.Andyoualsoneedtobedisciplinedwiththatmoneythat’ssittingonthesidelinesinordertoactuallyeventuallyinvestitandnoterodeitwithpurchases. What’stheBottomLineforInvestors? Asisthecaseinallaspectsofinvesting,it’simportanttoconsiderpotentialreturnsaswellasyourtoleranceforrisk. Investingallofyourmoneyrightawaymightyieldhigherreturnsthandribblingoutsmalleramountsovertime. Butifyou’relookingtoreduceyourriskandcontrolyouremotions,oryou’reconcernedaboutvolatilemarketconditions,thendollar-costaveragingcouldbeaviablestrategy—evenifthatmeansforfeitingsomepotentialupside.Ifyourmainconcernsarereducingshort-termdownsideriskandavoidingfeelingsofregretafterapotentialloss,dollar-costaveragingmightberightforyou.            SubscribetoUpdates