Pay Yourself First -- and Regularly -- Through Dollar-Cost Averaging
Dollar-cost averaging (DCA) is a technique used in buying mutual funds in which investments of defined amounts are made on a regular basis. For instance, an individual may choose to invest $100 per month in a given mutual fund at its then-current share price.
The benefit of DCA is that it offers a simple and gradual method to invest in the market in relatively small increments; as a long-term strategy, DCA can help you take advantage of the benefits of compounding to potentially build a sizable sum. Another potential benefit of DCA is that it ensures that your money purchases more shares when prices are low and fewer when prices are high. Over the long term, the result will likely be that the average cost you pay for the shares will be less than the average price. DCA can also offer the psychological comfort of easing into the market gradually instead of plunging in all at once.
DCA does not ensure a profit or protect against a loss in declining markets. And some claim that DCA may not be the best way to manage a financial windfall, which may fare better if put to use as soon as possible -- particularly in a rising market. Nonetheless, DCA does encourage a long-term perspective, which can be soothing for those wary of short-term volatility.