Dollar cost averaging

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Dollar cost averaging (DCA) is an investment strategy which aims to apply value investing principles to regular investment. The term was coined by Benjamin Graham in his 1949 book The Intelligent Investor. Graham writes that dollar cost averaging "means simply that the practitioner invests in common stocks the same number of dollars each month or each quarter. (The same nomenclature applies to commodity markets, even gold). In this way one buys more shares when the market is low than when it is high, and he is likely to end up with a satisfactory overall price for all their holdings." Dollar cost averaging is also called pound-cost averaging (in the UK), and, irrespective of currency, unit cost averaging, incremental trading, or the cost average effect. It should not be confused with the constant dollar plan, which is a form of rebalancing investments. The technique is called such because of its potential for reducing the average cost of shares bought. As the number of shares that can be bought for a fixed amount of money varies inversely with their price, DCA effectively leads to more shares being purchased when their price is low and fewer when they are expensive. As a result, DCA can lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time. The alternate strategies are to purchase a fixed number of shares each time period, or to save up the funds that are available for investment and attempt to purchase shares at times when the market is low, i.e. market timing. A major advantage of DCA is its long-term investment horizon, a simplification which promotes fiscal discipline; given its clockwork like methods, constant decisions are unnecessary.