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What is Dollar Cost Averaging?

Dollar cost averaging is the process of investing a fixed amount of money on a regular basis. With dollar cost averaging, you are repeatedly buying shares of an investment regardless of whether the price is up or down, thereby “averaging” the cost you pay overall. Dollar cost averaging helps you stick to your long-term investment plan and removes the emotional roller coaster that can come with daily price moves.

Here’s how dollar cost averaging works: You commit to investing $100 every month into a mutual fund. In the first month, the investment price is $10 per share, so you can buy 10 shares (disregarding any fees that may be associated with the purchase). During the second month, the shares are trading higher at $13, so you purchase only 7.7 shares. However, in the third month, the shares are $8, so you would receive 12.5 shares. And so on.

You may already be dollar cost averaging. When you set up an automated investment plan through Jemma Financial Services or when you contribute to a 401(k) or other retirement account through your employer, the plan removes a set amount at a regular interval to invest throughout the year.

One potential downside to dollar cost averaging: If you are investing on a regular basis outside of a retirement account, the transaction fees, if any, could be counterproductive. In this case, investing quarterly or bi-annually—not monthly—may be more financially beneficial.

Jemma Everyday Wisdom: Dollar cost averaging can be a prudent strategy that takes emotion out of investing and eliminates the temptation to try to time your purchases.

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