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What is dollar-cost averaging and how does it work?

Dollar-cost averaging is a strategy where you invest a fixed dollar amount on a regular basis, often monthly.

It's typically used to buy mutual fund units. When the mutual fund's price drops, you get more units for your set dollar amount invested, and fewer when the unit price has gone up. This technique lowers your average cost if the fund's unit price moves down. Here's an example where you contribute $100 a month to buy mutual fund units over a three-month period: You invest $100 on January 1 when the unit price is $10, so the number of units you get is $100 divided by $10 = 10. You invest $100 on February 1 when the unit price is $9, so the number of units you get is $100 divided by $9 = 11.11. You invest $100 on March 1 when the unit price is $12, so the number of units you get is $100 divided by $12 = 8.33. Your average cost per unit is your total investment of $300 divided by the total 29.44 units you've bought = $10.19. Whether you use dollar-cost averaging or some other strategy, a key to your returns, of course, will be the quality of whatever you invest in. To put this technique into action, you could have a mutual fund company or broker take a pre-authorized amount out of your bank account each month to buy units of the mutual fund. The same system could be used to buy company stocks through your broker. Dollar-cost averaging doesn't make a bad investment a good investment. But this simple approach may help you to set up a long-term investing program.