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When it comes to finance and investment concepts, we like to start simple, with a good definition. So we clicked over to Yahoo!'s Investment Glossaries category. We went straight to InvestorWords, the site with the sunglasses icon, which indicates an editorial endorsement. Three clicks later, we'd read that dollar cost averaging is: an investment strategy designed to reduce volatility in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving.
It's a strategy that's sometimes known as the constant-dollar plan. By investing a fixed amount at set intervals, the investor buys more shares when the security price is low and less when it is high, theoretically reducing the overall cost of the investment. Want to learn more? Morningstar's in-depth primer uses an entertaining scenario to explain how dollar cost averaging is used most effectively with the most volatile securities. As you might expect, the investor who is able to purchase the most shares comes out ahead. The About.com:
Investment Clubs site also offers an archive of articles exploring the pros and cons of dollar cost averaging.
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