Dollar Cost Averaging

If you are a first time investor, or any time investor, it's good to know what dollar cost averaging means.

QUESTION: Mark wants to know where the best place is to invest for a first-time investor. He asks Dave what dollar cost averaging is.

ANSWER: If you put in $100 every month or $1,000 every month into your mutual fund, sometimes you’re going to be buying more shares because the mutual fund is cheaper. Other times, you’re going to be buying fewer shares because it’s more expensive. You like it going down because you are buying more shares, and you like it going up because the shares are worth more. That’s called dollar cost averaging.

In terms of when is the best time to get involved in the stock market as a young person, you want to make sure to be out of debt with a fully funded emergency fund of 3-6 months of expenses. After that, your first investing goal should be for retirement. You do a Roth IRA or a 401k invested in a good growth-stock mutual fund with at least a 10-year track record. If you are willing to ride a roller coaster up and down, then you’re ready to invest in that kind of stuff. But if you can’t leave the money alone for 5 years, or you don’t have the stomach to handle the roller coaster ride, then don’t put money in it.