Legal Definitions - dollar-cost averaging

Dollar-cost averaging is an investment strategy where an individual invests a consistent, predetermined amount of money into a particular asset (such as stocks, bonds, or mutual funds) at regular, scheduled intervals, regardless of the asset's current price. This approach aims to reduce the overall average cost per share over time and mitigate the risk associated with market fluctuations by avoiding the need to predict market highs and lows.

• Example 1: Retirement Savings
  Sarah contributes $200 from each bi-weekly paycheck to her company's 401(k) plan, which invests in a diversified stock market fund. She has this contribution automatically deducted and invested without actively monitoring market conditions.

  Explanation: This demonstrates dollar-cost averaging because Sarah is investing a fixed dollar amount ($200) into a specific security (the diversified fund within her 401(k)) at regular intervals (every two weeks), regardless of whether the market is up or down. Over time, this strategy helps her acquire more shares when prices are low and fewer when prices are high, averaging out her purchase cost.

• Example 2: College Savings Plan
  The Miller family sets up an automatic transfer of $500 each month from their checking account into a 529 college savings plan for their child. The 529 plan then invests this money into a portfolio of index funds.

  Explanation: This is an example of dollar-cost averaging because the Millers are committing a consistent dollar amount ($500) to a specific investment (the index funds within the 529 plan) on a regular schedule (monthly). By doing so, they avoid trying to predict market highs and lows, instead building their college savings steadily over many years at an averaged cost.

• Example 3: Individual Stock Investment
  David decides to invest in a particular technology stock. Instead of buying a large block of shares all at once, he sets up an automatic investment plan to purchase $100 worth of that stock every Friday.

  Explanation: David is employing dollar-cost averaging by investing a fixed sum ($100) into a specific security (the technology stock) at regular intervals (weekly). This strategy allows him to accumulate shares over time, buying more shares when the stock price is lower and fewer when it's higher, thereby smoothing out the average price he pays for his shares and reducing the risk of making a single large investment at an unfavorable market peak.