How does dollar cost averaging reduce investment risk?

Dollar cost averaging reduces risk by spreading purchases over time rather than investing a lump sum at once. When prices are high, your fixed dollar amount buys fewer shares; when prices drop, it buys more. This naturally lowers your average cost per share over time and removes the pressure of trying to time the market perfectly. The main risk it addresses is timing risk, the danger of investing everything right before a market downturn. By investing consistently regardless of market conditions, you avoid the emotional trap of buying heavily during peaks out of excitement or avoiding the market during downturns out of fear. It won't guarantee profits or protect against a prolonged declining market, but it smooths out volatility's impact on your overall entry price.