Dollar-cost averaging: Pros and cons

Dollar-cost averaging is an investment approach worth understanding so you can decide whether it makes sense for you. Here’s an introduction.

When you dollar-cost average, you put a certain sum of money into a stock or fund on a regular schedule — no matter whether the market or the investment is rising or falling in value.

For example, you might allot $3,000 every quarter to an index fund. If you have a 401(k) account that receives a certain sum from your paycheck every pay period and puts it into one or more investments that you’ve specified, that’s another example of dollar-cost averaging.

When the price of whatever you’re investing in is up, you’ll get fewer shares, and when it’s down, you’ll get more. The upsides are considerable: For one thing, you don’t have to spend any time thinking about whether it’s a good or bad time to invest. Also, the practice can keep you from loading up at a bad time or selling off in a panic.

The stock market has always risen over long periods, though, so if you’re sitting on a large sum to invest and you plan to stay invested for many years, it’s reasonable to invest it all at once, or in a few installments over a few months. Otherwise, you’d be leaving cash on the sidelines for a long period, very possibly missing out on gains. Dollarcost averaging is best suited to those who keep generating money to invest over time.

It has a few drawbacks, however. If your investment account charges for each trade, those costs can add up. (Many major brokerages charge nothing for trades these days, though.) Also, if you’re dollar-cost averaging in a non-retirement account, things may get complicated when you want to sell some shares. You’ll need to keep good records of how much you paid for your shares each time, so you’ll be able to determine your taxable gain (or loss).

Dig deeper into dollar-cost averaging if you’re interested in giving it a try.