How does dollar cost averaging reduce investment risk over time?

Dollar cost averaging reduces risk by spreading purchases across multiple time periods rather than investing a lump sum at once. When you invest a fixed amount regularly, you automatically buy more shares when prices are low and fewer shares when prices are high. This smooths out the impact of market volatility on your overall cost basis. Over time, this approach lowers your average cost per share compared to buying at a single potentially high price point. It also removes the psychological pressure of trying to time the market, which most investors do poorly. The strategy is particularly effective in volatile markets because downturns become opportunities to accumulate more shares cheaply, positioning you for greater gains when prices recover.