Dollar cost averaging

A principle of investing where equal dollar amounts are invested in a share or unit at regular intervals in the hope of reducing the average cost by acquiring more shares in periods of lower securities prices and fewer shares in periods of higher securities prices.

Dollar cost averaging means adding a fixed amount of money on a regular schedule to an investment account, such as a mutual fund or a dividend reinvestment plan (DRIP).

Since the share price of the investment fluctuates, you buy fewer shares when the share price is higher and more shares when the price is lower.

The advantage of this type of formula investing, which may also be called a constant dollar plan, is that, over time, the average price you pay per share is lower than the actual average price per share.

But to get the most from this approach, you have to invest regularly, including during prolonged downturns when the prices of the investment drop. Otherwise you are buying only at the higher prices.

Despite its advantages, dollar cost averaging does not guarantee a profit and doesn't protect you from losses in a falling market.