Investors may not know it but, if they are participating in their company’s retirement savings plan, they are probably already practicing the investment strategy of dollar-cost averaging. Dollar-cost averaging is the process of investing equal, regular installments over a period of time to take advantage of fluctuations in the market. As the market fluctuates, the investor will buy more shares at lower prices and fewer shares at higher prices while maintaining the same investment amount.
Dollar-cost averaging avoids the pitfalls of trying to time the market. With lump sum investments you risk investing right before the market drops which, after suffering a large loss, may create fear and regret that will prevent the investor from investing again. Dollar-cost averaging works well in times of volatile markets and can limit the losses experienced when markets fall.