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What Dollar-Cost Averaging Is, and Why It Removes Emotion From Investing

Your First Investment • Beginner Investing • 6 min

What this lesson is about

Instead of trying to guess the perfect moment to invest, dollar-cost averaging removes the guessing entirely, the same amount, on the same schedule, no matter what the price is doing.

2 parts · a quick check after each · then the quiz

Part 1 of 2

Looking, for, the, right, moment, to, invest?, Waiting, for, a, dip, or, for, prices, to, settle, might, seem, smart., But, often,, it, just, leads, to, endless, hesitation, or, emotional, reactions, to, price, changes., Dollar-cost, averaging, (DCA), helps, you, avoid, this, issue., You, invest, a, fixed, dollar, amount, on, a, regular, schedule—like, every, paycheck, or, every, month—no, matter, what, the, price, is, doing., The, process, is, straightforward, and, genuinely, helpful:, a, set, dollar, amount, buys, more, shares, when, prices, are, low, and, fewer, shares, when, they’re, high., You, don’t, have, to, make, any, snap, decisions.

If, you’ve, ever, put, money, into, a, 401(k), through, payroll, deductions,, you’ve, already, practiced, dollar-cost, averaging., You, invest, a, fixed, amount, regularly,, every, single, paycheck.

Buying the same amount every monthA fixed sum buys more when the price is low. Turn the bumpiness up.

Quick check

What is dollar-cost averaging (DCA)?

Part 2 of 2

Insider, Angle:, DCA, isn’t, a, magic, fix, that, guarantees, better, returns., In, markets, that, tend, to, rise, over, time—like, the, U.S., stock, market—investing, a, lump, sum, right, away, has, typically, outperformed, DCA., This, is, because, more, money, gets, to, grow, for, longer., What, DCA, does, offer, is, behavioral, benefits:, it, helps, you, avoid, the, urge, to, time, the, market,, eases, the, stress, of, investing, during, volatile, times,, and, turns, consistent, investing, into, an, automatic, habit, instead, of, a, nerve-wracking, task.
Try, This:, If, you, have, a, 401(k), or, similar, account,, take, a, look, at, how, your, contributions, work., Are, they, a, fixed, dollar, amount, or, a, percentage, that’s, automatically, taken, from, every, paycheck?, That’s, dollar-cost, averaging, in, action,, whether, you, knew, the, term, or, not.

Quick check

Mechanically, what happens to the number of shares you buy with a fixed dollar amount when the price is LOW versus HIGH?

Quiz

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