Ask a Fool: How Do I Use Dollar-Cost Averaging to Build a Diverse Portfolio?
Dollar-cost averaging refers to the strategy of investing a set dollar amount in a stock at specific intervals. The idea is that you'll end up buying more shares when prices are low, and fewer shares when prices are high. For long-term investors, this is a mathematically favorable way to buy stocks.
However, the problem with dollar-cost averaging for many investors, especially new investors, is that it takes at least 10-15 stocks to have a properly diversified portfolio. Therefore, it may not be practical to average into a dozen or more stocks at the same time.
One solution is to use index funds instead of individual stocks. The principals of dollar-cost averaging still work, and you'll build a well-diversified base to your portfolio. For example, the Vanguard S&P 500 ETF (NYSEMKT: VOO) is one of the best index funds with which you can start investing in stocks, and is essentially a diverse portfolio of 500 stocks all in one investment.
Source: Fool.com
