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 dollars' 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.
More from The Motley Fool
Solar Companies Are Set Up for a Strong Earnings Season
Rising demand and prices for solar panel prices bode well for manufacturers.
Today's Workers Aren't Optimistic About Raises and Promotions, Data Shows
Surprisingly, a large number of workers across the globe think their chances of a pay or title boost are pretty low. Here's how to bust out of that cycle and propel your career forward.
Could These High-Flying Tech Stocks Start Paying a Dividend?
Alphabet, Facebook, and Adobe don't do it yet, but that could change sooner than you think.