Dollar-cost averaging is an investment technique for reducing the volatility of your portfolio. Rather than buying a security all in one go, people invest a fixed amount of money in the same fund or stock at regular intervals over time
The goal with dollar-cost averaging is to avoid buying high and selling low, but rather buying at an average price and hopefully selling later for a gain.
The downside to dollar-cost averaging
If you use dollar-cost averaging as an investment strategy, you are keeping your funds out of the market for an extended period of time. This means that you are potentially missing out on growth opportunities if the prices of your investments go up.
Should you use dollar-cost averaging?
A study done by Vanguard suggests that you’re better off buying the investment all at once, because, historically, stocks spend more time going up than they do going down.
The same study found that investing your money all at once gave investors better results than dollar-cost averaging 66 percent of the time. And the longer the time frame, the greater the chance that investing all at once was a better strategy.
However, humans are said to feel the sting of losses more intensely than the joy of gains. If the thought of investing your money all at once - and potentially seeing it fall in value shortly afterward - makes you nervous, then dollar-cost averaging can make sense. Paying a price (in the form of possible lost returns) for peace of mind can be a good idea in the same way that it is a good idea to pay for goods/services you feel a benefit from.
If you do choose to use dollar-cost averaging, plan to get your funds invested within a year. The odds of dollar-cost averaging outperforming a lump-sum investment become much lower the longer you wait to invest your cash.