Why Dollar Cost Averaging Works

Daniel Penzing
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Everyone has heard of Dollar Cost Averaging, but I'll bet many of you don't really understand how or why it works, much less why it's an important addition to your investing toolkit. Let me explain…

What is Dollar Cost Averaging?

It's basically a simple way to invest a consistent amount of money per month or per pay period in to the financial markets. Whether you choose to invest in a mutual fund, ETF, security, etc., DCA is simply a way to make small investments over time instead of a lump sum.

Dollar Cost Averaging is simple to understand and very difficult to execute. That's because it involves making choices, which is probably the most difficult part of the investing process.

Dollar Cost Averaging 101

Step 1 – Select an investment vehicle.

Step 2 – Decide on a monthly contribution.

Step 3 – Make payments.

Part 1 – Deciding on an investment vehicle is the easy part. Many mutual funds, ETFs, and/or individual securities offer directly into a 401k, IRA, or other qualified account. Investing in a Vanguard or Schwab fund is a great example.