Glossary
Dollar-Cost Averaging
Dollar-cost averaging is the practice of investing a fixed amount on a regular schedule regardless of market prices, so more shares are bought when prices are low and fewer when they are high.
Every 401(k) contribution from a paycheck is dollar-cost averaging in action. The method's mathematical edge is modest — for a lump sum already in hand, investing immediately has historically won more often than spreading it out — but its behavioral edge is large.
Why it matters in practice
The schedule removes the two hardest questions in investing — "is now a good time?" and "should I wait?" — by making the answer automatic. It keeps people buying through downturns, which is precisely when shares are cheap and when unscheduled investors tend to stop. For most households the practical form is simple: automate the contribution and let payroll do the discipline.
Related terms: Compound Interest · Volatility · Bear Market · Time Horizon