By: Rob Drury

Dollar cost averaging is just that; paying an average cost for an investment over time. A previous poster claimed that one would DCA himself into higher prices because of the general upward trend of the market. He is overlooking the fact that the purchase price of an investment is irrelevant; it is the relative movement of the price of that investment after purchase that is important. In other words, the probability of a short term loss is virtually equal to that of a short term gain (hence, an average). Because of this, the only thing on which the investor misses out is the opportunity cost of not having the entire available amount invested from the start, which could either either gain or lose during those intervals. The resulting reduction in risk far outweighs the increased earning potential of immediately exposing a lump sum. Very little long-term potential is lost, but tremendous safety is gained. Combine the DCA strategy with regular rebalancing, and one has a recipe for success that is as close to risk-free as the market can offer, without missing any significant growth potential. Any other way is simply gambling.