No Money and No Clue? This Investing Strategy Is For You

 Dollar-Cost Averaging is a strategy that allows you to invest small amounts of money regularly, regardless of what's happening in the market. When prices go down, you buy more shares. When prices go up, you buy fewer shares.

If you have $100 per month to invest, here's an example of what that might look like:

• Month 1: Stock price = $10, you buy 10 shares
• Month 2: Stock price = $8, you buy 12.5 shares
• Month 3: Stock price = $12, you buy 8.33 shares

More shares when the price goes down, fewer shares when the price goes up.

Why it's so great:

• You get to start small. Even $5 per month is enough to start building wealth. The key is to set it up in regular intervals.
• It can lower the average cost per share in a volatile market.
• It helps you avoid the temptation of not investing when the market is weak.
• It's a great long-term strategy and a great habit.
• Low-no-stress. Set it and forget it!

 Believe it or not, when you set up a system where you're dollar cost averaging into a diverse and low-fee index fund, you don't need to know…

• anything about the stock market
• how to execute a trade
• anything about the companies you're investing in
• if the market is trending up or down

You can get on with living your life without the stress of trying to outsmart the market!

D. C. A.

My favorite non-finance example of how DCA works: Packs of gum.

Suppose you want to buy $100 worth of gum each month.

In the first month, each pack of gum costs $1.00. You buy 100 packs.

In the second month, the price drops to $0.50 per pack. Now you can buy 200 packs, with the same $100.

But when the price rises to $2.00, you can only buy 50 packs.

When the price of the stock or index (or gum) goes down, you can buy more shares with the same amount of money.

My favorite finance example of how DCA works: 401(k) contributions.

When you contribute to a (Roth or traditional) 401k, your employer automatically withdraws a pre-determined contribution from each paycheck, regardless of what is happening in the market. These funds are almost always invested in low-fee and diverse index funds. When you contribute to a 401(k), you are Dollar Cost Averaging.

Sometimes the market is up, and sometimes it's down, but by investing consistently, you smooth out the cost of your investments and reduce the impact of market volatility. This is the essence of dollar-cost averaging.

D. C. A.

"I tried dollar-cost averaging… now I have to explain to my friends why I get excited when the market tanks!"