What is dollar-cost averaging?

Dollar-cost averaging is paramount to perform properly, and understand, when it comes to investing for your retirement. The definition of dollar-cost averaging is rather simple. It’s merely investing a fixed amount of money on a regular basis into the market, regardless of the share price.

The last part of that is vital. Invest into the market despite the share price, e.g. do not try and time the market and predict its ups and downs. Anyone who thinks they can is fooling themselves (and you!). You need to just invest. Invest regularly. If the market goes up, keep investing, because the market should continue to rise over the long term. If the market drops, drastically or mildly, continue to invest because you just bought shares on sale! You have to keep at it and continue to invest for your retirement via dollar-cost averaging.

For example, I have a set percentage of my paycheck that comes out every two weeks and goes into my employer sponsored 401(k) plan. To take dollar-cost averaging one step further, I actually invest into a Vanguard Roth IRA on the weeks I don’t get paid. So I personally buy into the market every single week via dollar-cost averaging.

My wife is independent and has her own business. We max out a Vanguard Roth IRA for her personally by making a set investment each and every month so we meet the contribution limit for a Roth IRA of $5,500.

Find your appropriate asset allocation, and for Millennials I strongly suggest you be aggressive because you have time on your side, and invest at least every month. If you can, invest bi-weekly, if not weekly and continue to invest into the stock market via dollar-cost averaging.

If you have a lump sum to invest into the market, that’s fantastic. Invest it as soon as you can. But don’t consider yourself done once you do that. Your lump sum investment should be done in addition to your dollar-cost averaging investment strategy.



4 Comments for “What is dollar-cost averaging?”

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