Slow and Steady Wins the Race
Why? Let's say you have $12,000 to invest this year and you have picked a mutual fund to put it in. Shares of this fund have gone as high as $15 but have fallen to $10. Now's your time, you think, and you invest all $12,000 in 1,200 shares. Oops! You were wrong. A temporary setback drives the share price even lower, and a year later shares are selling for $5. On paper you've lost $5 a share, for a total loss of $6,000; what's more, you have no money to buy more shares at the lower price (when they may be a real bargain).
If you take the same $12,000 and invest it in the mutual fund in stages, at the rate of $1,000 a month over a year, here's how you'll come out: After one year, you own a total of 1,717 shares, worth $8,585 at $5 a share. Even though the price per share is down to $5, your loss on paper is only $3,415, or $2,585 less than if you had bought the fund outright. You also own 517 more shares to profit from should the price go back up. When it's at $10 again, you'll have 1,717 shares, worth $17,170, instead of the $12,000 you'd have if you had bought them all at once. (By the way, if you contribute to an IRA or a 401(k) every month, you're already using the principles of dollar-cost averaging.) This method, like all recommended strategies for investing in the stock market, depends on your having at least ten years before you need the money you invest.