FOOL'S SCHOOL DAILY Q&A
Dollar Cost Averaging
Slow and steady wins the race

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By Selena Maranjian (TMF Selena)
May 23, 2002

Q. Can you explain what "dollar cost averaging" is?

A. Dollar cost averaging can be a good way to protect yourself from a volatile market. It's the practice of accumulating shares in a stock or mutual fund over time by investing a certain dollar amount regularly, through up and down periods.

For example, you might purchase $500 worth of Scruffy's Chicken Shack (ticker: BUKBUK) stock every three months. You'd do this regardless of the stock price, buying 10 shares when the price is $50 (10 times $50 is $500) and eight shares when it's $60 (eight times $60 is $480).

The beauty of this system is that when the stock slumps you're buying more, and when it's pricier you're buying less. It's an especially good way to accumulate shares if your budget is limited. (Buying regularly through dividend reinvestment plans, or "Drips," is a form of dollar cost averaging.) Don't drown in commission costs, though -- dollar cost average only if you can keep commissions below 2% or if you're buying through direct-purchase plans.

Also, if you're dollar cost averaging by the book, you shouldn't be second-guessing the market, deciding to skip an installment because the stock is up or down. It's meant to be a methodical system.

Take some time to learn more about "Drips" (direct investing plans, or dividend reinvestment plans). Read about the power of dividend growth and the power of Drip plans. Also, check out our guide to Drip plans: Investing Without a Silver Spoon: How Anyone Can Build Wealth Through Direct Investing.

If you have any questions, thoughts or opinions on this topic, share them with others on our discussion board for Ask the Fool.

This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.