Description: Matt Brundage: Maryland web design and development, blog, essays and publications, photos
Dollar-cost averaging (DCA) is the practice of making regular, equal-value purchases of an investment instrument (usually equities), rather than making a single lump-sum investment as soon as possible. The perceived benefit of DCA is that it enables the investor to buy shares at variable prices throughout the investment period, purchasing more shares when prices are lower, and fewer shares when prices are higher. It’s smart to buy low, right?
The problem with dollar-cost averaging is that it’s another way of trying to time the market — albeit, methodically.
For example, let’s say that you’ve earmarked some money in a savings account and start dollar-cost averaging this money into a broad stock market fund. By doing so, you would be continuously betting that the average share price for the remainder of the DCA investment period will be lower than the current share price if you were to make an immediate lump sum investment. In other words, you’re keeping your money out of the stock market in anticipation that the market will go down.
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