Forbes: “Dollar cost averaging is a strategy to manage price risk when you’re buying stocks, exchange-traded funds (ETFs) or mutual funds. Instead of purchasing shares at a single price point, with dollar cost averaging you buy in smaller amounts at regular intervals, regardless of price.
When investors purchase securities over time at regular intervals, they decrease the risk of paying too much before market prices drop.
Prices don’t only move one way, of course. But if you divide up your purchase and make multiple buys, you maximize your chances of paying a lower average price over time. In addition, dollar cost averaging helps you get your money to work on a consistent basis, which is a key factor for long-term investment growth.
If you have a workplace retirement plan, like a 401(k), you’re probably already using dollar cost averaging by default for at least some of your investing.
Dollar cost averaging works because over the long term, asset prices tend to rise. But asset prices do not rise consistently over the near term. Instead, they run to short-term highs and lows that may not follow any predictable pattern.
Many people have attempted to time the market and buy assets when their prices appear to be low. This sounds easy enough, in theory. In practice, it’s almost impossible—even for professional stock pickers—to determine how the market will move over the short term. Today’s low could be a relatively high price next week. And this week’s high might look like a fairly low price a month from now.”