Dollar-Cost Averaging

The mechanic is simple. A set sum goes in at a set interval, monthly for instance, regardless of what the price is doing that month. Because the sum is fixed and the price is not, the same money acquires more shares in the months when the price is low and fewer in the months when it is high.

Most people who do this have never called it that. A workplace retirement contribution taken out of every paycheck is dollar-cost averaging by default, because the deduction is fixed and the market is wherever it happens to be on payday.

The arguments about it run in both directions and are worth knowing as arguments rather than as a conclusion. Those who favor it point to what it removes: no decision about when to act, and no single price that the whole result hangs on. Those who question it point to studies finding that historically, a lump sum invested at once has finished ahead of the same money spread out more often than not, simply because markets have risen in more years than they have fallen. Which of those weighs more depends on the money and the temperament involved, and this site does not answer that question for anyone.

What it is not is protection. A steady schedule running through a decline still loses money on the way down. It changes the average price paid, not whether the holding works out.