An investing strategy to consider
Dollar-cost averaging is when you invest equal dollar amounts at regular intervals—like $25 a month—whether the market or your investment is going up or down. Want to know if this strategy's right for you? It's helpful to understand the math.
Here’s an example…
Say you decide to invest using a dollar-cost averaging strategy. And on the 1st of every month, your account is set to automatically buy $25 of Qualified Robotics Scientific (QRST), a fictional company.
- January 1: QRST trades at $10 per share. $25 buys 2.5 shares.
- February 1: QRST trades at $12.50 per share. $25 buys 2 shares.
- March 1: QSRT trades at $10 per share. $25 buys 2.5 shares.
When the market moves…
On March 15, the company makes a major announcement: their new robot dog is here. This dog can fetch shoes, find keys, and protect the yard—all without any of the responsibility of having an actual dog.
By April 1, QRST trades at $50 per share. Your $25 buys ½ share.
Things continue like this till May. Until a rogue robot dog fetches its owner's foot instead of a shoe. And... QRST falls to $8. In September, your $25 buys 3.125 shares.
But guess what? It turns out that dog bite story was just a hoax—and the stock price rose.
Dollar-cost averaging can help manage risk…
The price of stocks can change like this in real life. Investors may use dollar-cost averaging to help navigate uncertain times. It can also serve as a risk management trading strategy if you end up buying more when the price is relatively lower—and buying less when the price is relatively higher.
Dollar-cost averaging can help take some of the guesswork and emotion out of investing, which may keep you from panicking when prices fall or buying more when things might seem to be too good to be true.
While dollar-cost averaging doesn't ensure a profit or protect against loss in declining markets, it's a strategy that some investors use to make regular contributions without trying to "time the market."