What is dollar cost averaging and how does it work?

Dollar cost averaging is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of the asset's price. For example, you might invest $200 every month into a stock or index fund. When prices are high, your fixed amount buys fewer shares. When prices are low, it buys more shares. Over time, this averages out your cost per share, reducing the impact of market volatility. The key benefit is that it removes the pressure of trying to time the market perfectly. Instead of investing a lump sum at potentially the wrong moment, you spread purchases over time. This approach is common with 401k contributions, where a set amount is automatically invested from each paycheck.