Dollar-cost averaging is a long-term investment technique. The goal of dollar-cost averaging is to buy more of an asset at times when the price is lower. Dollar-cost averaging is accomplished by establishing a fixed dollar amount that an investor will use to purchase a specific investment or investments at regular intervals.
The most typical application of dollar-cost averaging is in a 401-K, or similar retirement account. Generally, a retirement account holder will set up automatic withdrawals from a paycheck, and these withdrawals are used to purchase securities. When the prices of securities are higher, the investors purchase fewer shares (units, etc.). When the price is lower investor purchases more shares or units. Over time, in theory, the investor will accumulate more shares at lower prices.
An important ket in dollar-cost averaging is to continue investing when markets and security prices decline. If an investor discontinues purchasing securities when the price declines, the investor will not get the benefits of dollar-cost averaging.
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