What is 'dollar-cost averaging'?

• A. Investing a varying amount based on market conditions
• B. Investing a fixed amount of money at regular intervals
• C. A strategy used to determine when to sell investments
• D. A method of tracking investment performance over time

Answer: (B)

Dollar-cost averaging is an investment strategy where an investor commits to investing a fixed amount of money at regular intervals, regardless of market conditions. This approach allows the investor to purchase more shares when prices are low and fewer shares when prices are high, effectively averaging out the cost per share over time. This method can reduce the impact of volatility and market fluctuations, as it helps to mitigate the risk of making a large investment at an inopportune time.

By consistently investing the same amount, an investor can also develop a disciplined saving and investing habit, which can be beneficial in building wealth over the long term. This strategy is particularly useful for those who may be entering the market without a lot of investment experience, as it removes some of the emotional decision-making tied to investing.