Dollar-Cost Averaging, and Where It Breaks
Here is a question that has cost people more money than any chart pattern ever will.
When should I buy?
Dollar cost averaging is a way of refusing to answer it.
The idea could not be simpler. You buy the same dollar amount on a schedule. Same money, same day, whatever the price happens to be that morning. You do not look at the chart first. That is the point.
When the price is high, your money buys less of it. When the price is low, your money buys more. Do that long enough and your average cost lands somewhere in the middle. And here is the part worth noticing: you never had to be right about timing. Not once.
What it really does is take one decision out of your life. When.
That sounds like a small thing. It is not.
Most of the damage people do to their own accounts is timing damage. Buying after a long run, because that is when it finally feels safe. Selling after a drop, because that is when it finally feels dangerous. Both feelings arrive exactly when they are least useful, and both are nearly impossible to argue with in the moment.
A schedule does not feel anything. That is its whole advantage.
Now let me be honest about what it does not do, because this is where it gets oversold.
It does not protect you. If the thing you are buying goes down and stays down, averaging in simply means you bought it at many prices instead of one. It smooths the ride. It does not change the destination.
So here is the honest summary.
Dollar cost averaging is a discipline, not a strategy. It fixes the part of investing that is about you, and leaves the part that is about the market exactly where it was.
For most people, that is still the best trade available.
Keep going
The Investing Explainers are written by Kanin D. Alldredge for The Currency Classroom, and they are free to read. CNS Pro adds a brief before every market open, his column, and the weekly and monthly letters.
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