With Dollar Cost Averaging, you want to invest a set amount of money over regular intervals of time so that the average cost of stock shares purchased will even out even through the stock market's peaks and troughs. When you invest with dollar cost averaging, your dollars will purchase fewer stock shares when the market is up and they will buy more stock shares when it's down.
Over the long run, it really doesn't matter when you start, just that you start to invest. Over a long period of time, it will make little difference whether the stock market was up or down when you began to invest. The stock market has averaged almost 10% growth since 1929, even when you include the sustained decline in 2000.
More additions with smaller amounts is a good way to invest with cost dollar averaging. Making monthly investments to your account allows you three times as many opportunities to benefit from favorable market swings as investing on a quarterly basis. It also provides you with three times as many chances to buy in a decreasing market. The more frequently you invest and the longer you keep investing with cost dollar averaging, the smoother the average-share-cost line becomes.
When investing with dollar cost averaging, a market decline can be a good thing because it can mean bargain prices for stocks. Unless you are selling shares, a fund's price quote in the daily paper is not relevant, so don't panic if the stock market is down. In fact, a stock market downturn provides the opportunity to invest in more shares at attractive prices that have the potential to grow in value when the market returns to an upward growth pattern. Remember that in order for dollar-cost averaging to work, you must be prepared to commit the financial resources and have the resolve to make the contributions on each appointed date over a long period of time.
Investors should consider their ability to invest continuously during periods of fluctuating price levels and their tolerance for risk before deciding on an investment strategy, but dollar cost averaging is a quality way to invest for most people.