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Dollar Cost Averaging
How to use dollar cost averaging
Dollar-cost averaging is a useful investment tool which can be used in the following ways:
Alternatively, if you've been saving hard for many years for your retirement, you run the risk that a sudden fall in the market will quickly reduce the value of your retirement investments.
In both examples, you can use dollar-cost averaging to protect the value of your investments.
In the first example, instead of investing the lump sum immediately, you could dollar-cost average your investment into the market over a period of several years. This would protect your initial investment from any sudden fall in the value of the market.
In the second example, you could dollar-cost average your retirement capital out of the market. That means you don't have to worry about the level of the market when you retire, as you can gradually use and reduce your investment capital over the length of your retirement.