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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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