Dollar Cost Averaging
What Does Dollar Cost Averaging Mean?
Dollar cost averaging is an investment strategy in which the investor purchases a fixed dollar amount of a specific investment vehicle at regular intervals over an extended period. This method helps mitigate the unpredictable nature of the market, which can fluctuate significantly. In the context of insurance, many life insurance policies include an investment component, and dollar cost averaging is one approach insurers use to manage these investments.
Insuranceopedia Explains Dollar Cost Averaging
With dollar cost averaging, an investor consistently invests the same amount at regular intervals, regardless of market conditions and share prices. For example, if X buys $1,000 worth of shares in Y Company every month for four months, starting with a price of $20 per share and experiencing fluctuations down to $18 per share by the end of that period, X may end up purchasing 300 shares at an average cost lower than the final share price. As a result, even though Y Company’s shares have decreased in value, dollar cost averaging enables X to achieve a profit.
