Periodic Investing Explained

A fixed amount, a regular schedule

Dollar-cost averaging means investing fixed amounts at regular intervals regardless of price changes. With the same contribution, you buy more units when the price is lower and fewer when it is higher. Units are the portions of an investment that you own. FINRA explains this approach and its trade-offs.

A schedule can reduce emotional decisions and the pressure to pick a perfect entry date. But it does not guarantee a profit or stop an investment from falling in value. A disciplined buying process and a safe investment are not the same thing. FINRA.

A hypothetical example with a loss

Suppose you invest €100 at a price of €10 per unit and another €100 at €5. You buy 10 units, then 20: 30 units for €200, an average cost of about €6.67. At the final price of €5, they are worth €150, so you still have a €50 loss before costs. These prices are invented teaching assumptions. Buying more at lower prices does not remove losses, consistent with the limits described by FINRA.

Two common questions

Is investing each month's new savings the same as delaying an existing lump sum? No. New savings arrive gradually. If you already have the whole amount, spreading purchases means some money stays uninvested for a time. FINRA distinguishes these situations when explaining the trade-offs. FINRA.

Is spreading purchases always better? No. If prices rise while part of an available lump sum stays in cash, delaying purchases can mean lower returns than investing it sooner. More frequent transactions can also create more fees. The approach has advantages and limits, not a guaranteed ranking. FINRA.

Explore a hypothetical portfolio in the simulator and continue with how much to invest each month.

Sources

• FINRA — The Benefits and Limitations of Dollar-Cost Averaging

This article is for educational purposes only and does not constitute financial advice.