If you enter “dollar-cost averaging” (DCA) into your browser you will get about 700,000 hits. (We actually expected more.) It seems immodest to say so but we have yet to see a better explanation of how to benefit from DCA than the one you see below.
Dollar-cost averaging is a technique which involves investing the same amount of money at the same regular intervals over a long time. Whether or not it is effective depends on two factors:
- The security in which the funds will be invested and
- The source of the funds.
Concerning the security in which the money is invested, if it involves picking a single stock, the investor could be throwing good money after bad. It would result in a total loss if the stock falls out of bed. On the other hand, if the money is invested in a market index ETF, namely, invested in the American economy, it will produce excellent results in the long run, until the American empire fails. Someday, that will happen, but it is not on the horizon at this time.
Concerning the source of the funds, if it is from an earnings stream such as a salary or investment dividends or rental income and it is invested in a market index exchange-traded fund (ETF), it is a guaranteed, safe way to beat the market. On the other hand, if the source is from a lump sum the same amount of which is invested at the same regular intervals while the remaining sum is kept in cash or bonds, the benefits are not clear. We might be looking at an ineffective strategy. The Monday Morning Millionaire Program gets around that in a reliable, predictable and safe way.