What is the primary principle of dollar-cost averaging?

The primary principle of dollar-cost averaging revolves around the strategy of regularly investing a fixed amount of money over specified intervals, regardless of the price of the investment at the time. This approach reduces the impact of volatility in the market by allowing investors to purchase more shares when prices are low and fewer shares when prices are high.

By consistently investing the same dollar amount, investors avoid the challenge of trying to time the market and making decisions based on short-term fluctuations. Over time, this can lead to a lower average cost per share, which can benefit investors in the long run, especially in volatile markets. The emphasis on regular, fixed investments helps to instill discipline and reduces the risk of making emotional investment decisions based on market conditions.

Other strategies, such as attempting to time the market for maximum returns or investing large sums infrequently, do not offer the same level of risk mitigation and can expose investors to greater volatility. In essence, dollar-cost averaging is not only about the amount invested but also about the consistent approach to investing over time.