Dollar-cost averaging refers to a method of investing a fixed amount of money over time that reduces the risk of buying investments when prices are higher than average. The theory is that you buy fewer shares when the price per share is higher, and more shares when the price per share is lower.*
Investing in a 401(k) plan is a way to dollar-cost average, since the same contribution is deducted from your paycheck each pay period. Dollar-cost averaging is a common investment strategy, and your 401(k) plan lets you do it easily.
*Dollar-cost averaging cannot guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels.
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