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Some people stop investing when the stock market climbs, fearing they will pay too much. Others sell their investments when the market drops or retreat to the sidelines to simply watch.
Dollar-cost averaging can put those market swings to work for you and helps take the emotion and guesswork out of investing. With this strategy, you regularly invest a specific dollar amount, such as through an automatic investment plan, even during economic or market downturns. As a result, you buy more fund shares when their price is low and fewer when it's high, which can drive down your average cost per share.
Here's how dollar-cost averaging could work. Suppose you invest $100 a month in a mutual fund. At the end of six months, you own 34 shares that cost $600. As shown in the table below, your average cost was $17.65 per share ($600 divided by 34 shares). The average price per share during that period was $18.91 (total share prices of $113.46 divided by six months).
You invest $100 a month for six consecutive months.
This information is for illustrative purposes only and is not intended to represent any particular investment product.
If you had invested the full $600 in the first month, you would have bought only 24 shares at $25 each. With dollar-cost averaging, you bought 10 more shares and reduced your cost per share by more than $7.
Dollar-cost averaging does not ensure a profit or protect against short- or long-term losses in tough times, but it does take some of the emotion out of investing. It can help you stick to your plan, even when the markets are declining and you may be tempted to stop investing or to sell your holdings. Dollar-cost averaging can be particularly effective for building your investments gradually over time.
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This information is for educational purposes only and is not intended as investment advice.