Is Dollar-Cost Averaging for You?

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 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, so you'd buy 10 shares when the price is $50 (to reach your $500) and eight shares when it's $60 (a total of $480).

The beauty of this system is that when the stock slumps, you're buying more of it, 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. You should engage in dollar-cost averaging 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 by deciding to skip an installment because the stock is up or down. Dollar-cost averaging is meant to be a methodical system.

Take some time to learn more about "Drips" by reading about the power of dividend growth and the power of Drip plans.

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