You want to buy low and sell high, but guess what?

So does everyone else.

If youd invested in an S&P 500 index fund then, youd be 50% richer today.

A woman looks over her investing portfolio at a cafe.

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But none of us knew on March 23 that wed reached bottom.

Then the stock market rallied, even as the economy sputtered.

So how are you supposed to buy low when prices are high?

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And how do you avoid overpaying when youinvest in stocks?

Reality check: Youre not always going to buy low.

By the time you feel confident enough to invest following a crash, prices have already risen.

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No Interest Til Almost 2027?

What Is Dollar-Cost Averaging and Why Is It a Good Idea?

Suppose you had $12,000 cash to invest.

You could invest it all at once in a lump sum.

If you did the latter, youve chosen the dollar-cost average approach.

You could invest every month, every quarter, even every year.

Usually the simplest approach is tomake a budgetand then automatically invest a certain amount every month.

Youll pay more for investments when the market is up.

But youll also get those bargain prices following a crash.

Often your average cost over time is lower as a result.

Study after study shows that market timing is a losing game.

The best days of the stock market often happen shortly after the worst ones.

Morgan Asset Management analysis.

Your average returns would have been 5.62%.

The consistency of dollar-cost averaging takes the emotion out of investing.

Many financial planners also like dollar-cost averaging because it makes you a more disciplined investor.

If you contribute to a401(k) plan, youre already practicing this strategy.

You invest a percentage of each paycheck regardless of the stock markets performance.

When the market is down, your money buys more shares.

When its up, your money buys fewer shares.

Same goes for if you automatically fund aRoth IRAortraditional IRA.

You paid $9,000 in a lump sum for an imaginary S&P 500 index fund.

You paid $100 per share, so you got 90 shares.

But since you accepted your lack of psychic powers, you decided to do the next-best thing.

You practiced dollar-cost averaging.

Your average cost per share over the nine-month period: $94.16.

Why couldnt I have invested everything in a lump sum on March 23, when prices were lowest?

You would have paid just $68 per share.

Remember: Youre not psychic.

Does Dollar-Cost Averaging Protect You From Losing Money?

Dollar-cost averaging only works if you stick with it when things get really bad.

You got cold feet and didnt scoop up those low-cost shares.

But as with any investment strategy, dollar-cost averaging only works if your investment gains value over time.

Your shares will still be worthless.

The tricky thing is that you have to strike a balance.

Monitoring the daily fluctuations of your investments is a bad idea.

But you shouldnt set everything on autopilot, either.

If youve invested in a company thats consistently losing money, it may be time to cut your losses.

Dollar-cost averaging removes a lot of the stress surrounding your investments, but its not a set-it-and-forget-it strategy.

While it provides you a safety net from market volatility, it doesnt protect you from losing money.

Does Lump-Sum Investing Ever Make Sense?

When we talk about dollar-cost averaging, were assuming youre not sitting on a boatload of cash.

Dollar-cost averaging protects you against shorter-term price volatility.

Investing across the stock market is a good move because it gives you an automaticallydiversified portfolio.

Your returns will vary, but they average 7% to 8% when you adjust for inflation.

Youll benefit from giving that money as much time to grow as possible.

Another time lump-sum investing makes sense is when you have a one-time windfall, like atax refundorbonus.

Investing it all at once beats spending it on things you dont need.

The bottom line: You wont always buy low.

Sometimes youll buy high.

What matters most is that you’ve got the option to sell even higher.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder.

She writes the Dear Penny personal finance advice column.

Send your tricky money questions to[email protected].