Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals.
In effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices. The goal of dollar-cost averaging is to reduce the overall impact of volatility on the price of the target asset; as the price will likely vary each time one of the periodic investments is made, the investment is not as highly subject to volatility.
The key advantage of dollar-cost averaging is that it reduces the effects of investor psychology and market timing on their portfolio. By committing to a dollar-cost averaging approach, investors avoid the risk that they will make counter-productive decisions out of greed or fear, such as buying more when prices are rising or panic-selling when prices decline.
