Often referred to as DCA
. An investment strategy
which involves investing a fixed
sum into a security
on a periodic basis
. For example, I might choose to invest $100 per month in my favorite mutual fund
. The theory
is that such a program
will result in my purchasing more shares when the share price is on the decline
and fewer when the price is rising. So if the share price
is $10, I will purchase 10 shares per month; if it is $20, I will only purchase five shares. In short, it's a way of ensuring that an investor takes advantage
during times when an investment may be "on sale
Dollar cost averaging is not a strategy that's designed to make people money--it's a reasonable way of putting some money into the market one bit at a time, so as to help avoid the unpleasantness that occurs when the market collapses immediately after you invest $50,000. And while you will buy more shares of your target investment when prices are down, this won't help if the share price never comes back up.
Therefore, the National Association of Securities Dealers (or NASD, the self regulating organization for American investment companies) requires the following disclaimer appear on all marketing materials that refer to dollar cost averaging (by name or otherwise):
Programs of regular investing cannot ensure a profit or protect against losses in a declining market. Consider your ability to continue funding such a program through periods of low price levels before investing.