What Does Dollar Cost Averaging Mean?
Dollar cost averaging is an investment method where the investor purchases a set dollar amount of a specific investment vehicle at regular intervals over a course of longer period. It is a way to offset the unpredictable nature of the market, which may rise or fall at any time. In the context of insurance, many life insurance policies offer an investment component, and dollar cost averaging is one way insurers make these investments.
Insuranceopedia Explains Dollar Cost Averaging
Regardless of the financial market and share costs, with dollar cost averaging, an investor invests the same sum at regular intervals. For example, if X purchases $1,000 of shares of Y company every month for four months, with the price starting at $20 per share and fluctuating up and down to $18 per share at the end of this period, X may end up having bought 300 shares at an average cost lower than the final share cost. In this way, despite the fact that Y company's shares went down in value, dollar cost averaging nevertheless allowed X to make a profit.