Dollar Cost Averaging: Warren Buffet’s Advised Path Toward Long Term Success

If you like spending six to eight hours per week working on investments, do it. If you don't, then dollar-cost average into index funds.” - Warren Buffet

What Is Dollar Cost Averaging?

Dollar cost averaging is an investment strategy to manage risk when investing in typically ETFs or mutual funds. A buyer spreads out their purchases consistently over time in order to lessen the impact of market swings. In other words, it is the process of investing the same amount of money at regular intervals, say monthly, without considering fluctuations in price.

Benefit of Dollar Cost Averaging

The primary advantage of dollar cost averaging is to have a low risk method of investing your money, which almost always increases in value in the long term. When investors pay at regular intervals over time, they lower the chance of paying too much before market prices drop. Additionally, ETFs, mutual funds, and stock indexes are typically not going to fluctuate drastically in value, and frequently investing small portions of income into these funds would yield a return on investment in the long run.

Dollar cost average also plays a role in eliminating emotion as a risk factor when investing. It helps fight the greed that tempts people into putting too much money into an investment when they think the price is low and removes the fear that comes with buying when they think prices are too high. By buying the same amount of an asset regularly, you are less shares when the prices are high and more shares when the prices are low.

Simple table that depicts the long term gain associated with dollar cost averaging no matter the market price fluctaution

Who is Dollar Cost Averaging For?

Dollar cost averaging is a long term investment technique. Meaning, one will not find incredible profits in a short amount of time like they would when investing in individual stocks when they are down. This method of investing is primarily for people willing to see gains over a long period of time. Furthermore, people with less money to invest find great benefit in dollar cost averaging as they may not have a large sum of money at once to see real gains over time. Lastly, people who are not willing to dedicate the necessary time and effort to research market swings can utilize dollar cost averaging toward an index like the S&P 500.