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What is dollar cost averaging?

What is dollar cost averaging?

Dollar cost averaging (DCA) is a method of hedging against the risk of investing a lump sum at high market prices. With DCA, the investor deploys money at set intervals, hoping to get the best average price per share.

If you use the same amount of money to buy shares at set intervals, you will acquire more shares when the market is down, and fewer shares when the market is up, so theoretically you would have acquired more of the advantageously-priced shares overall and will be in a better position in the long run.

There is the opportunity cost, however, of keeping some money on the sidelines earning a risk-free rate, or even a slightly higher percentage as offered in some vehicles.

If the market experiences fewer downturns than upside, however, the strategy could work against the investor who ends up purchasing at a higher average price per share than if they deployed their capital all at once.

Keywords: hedging, Dollar Cost Averaging (DCA), opportunity cost, market downturns, intervals, market upturns,