You may have heard the strategy, "Buy Low, Sell High," when dealing with investing. This is a great idea, but in practice is almost impossible to do. With the fluctuations in the market, your best bet is to always be buying. The idea behind regularly purchasing shares of a security is called dollar cost averaging, and it is one of the oldest ways of investing. Although it may not be exciting, it does provide results.

Dollar cost averaging requires investing the same amount of money on a regular basis, usually monthly or quarterly, regardless of the share price of the stock you are buying. By using this simple discipline, you are smoothing the market fluctuations by averaging out your investment costs. If you invest only when the market is up because you feel optimistic about the future, your dollars are purchasing fewer shares. However, by purchasing when the market is down, your dollars will buy you more, giving you a bargain price. So why not only purchase when the market is low? For years investors have been trying to do this, and they can't. For you to attempt this would do nothing but give you a huge headache and probably hurt your financial status. Dollar cost averaging would eliminate the necessity of timing the market by providing you with a lower average cost per share, and also rewarding you with more shares of a given security.

Over the course of the next year, you have set aside $12,000 for investment purchases. You can choose either to invest it all at once, or in smaller amounts over the course of the upcoming year.

If you choose to invest all at once, your $12,000 might grow like this:

If you chose to invest over the whole year in smaller amounts, your investment may look like this:

The price per unit of the stock fluctuates as the market fluctuates. The example reflects that when the price goes up, you are purchasing fewer shares, but when the price is down, you can purchase more shares. Over the course of the year, you would realize an average cost of $14.36 per share, which would allow you to purchase an additional 48 shares and earn $786.72 more than if you had not used the method of dollar cost averaging.

As an investment strategy, dollar cost averaging will provide you with a number of advantages. By using this approach, you eliminate the need to decide when to invest, as you invest a set amount every month after you get your plan underway. This approach to investing also helps you avoid the temptation of trying to time the market, known as the buy low, sell high strategy. If you invest consistently over a period of time, the fluctuations of the market will be smoothed out. The most important advantage of dollar cost averaging is that it encourages discipline in your program. For this method to work, you must purchase a specific dollar amount every month. Although the price of your investment may drop over the course of one year, if you continue to invest, you will eventually realize the lower average cost. The price should eventually regain and pass what it was before, and this will allow you to sell a larger number of shares at a higher price. Dollar cost averaging doesn't guarantee a lower overall price, but, over time, it smoothes out market fluctuations.

Having enough money to be comfortable when you retire should be one of the long-term goals of your financial planning. A 401(k) plan will offer you an excellent way to implement dollar cost averaging. In this type of investment, money is deducted and placed into your investment plan each pay period. Over time, you will realize the average lower per-share costs of dollar cost averaging. Another strategy you can use to build your retirement nest egg is through the reinvestment of dividends and capital gains. This is also a form of dollar cost averaging and one of the smartest things investors can do, as reinvesting usually costs you nothing in additional fees. You must remember that these plans are like all other forms of dollar cost averaging that, for them to be successful, you must continue to systematically purchase securities.

Dollar cost averaging may seem like a boring way of investing your money, but it is effective nonetheless. If you choose to use this as your investment tool, you must remember that it neither guarantees profits nor eliminates losses. It does, however, provide a method of investing that will reduce anxiety over movements in the investment markets. Dollar cost averaging will only work if you continue to purchase systematically, regardless of market fluctuations. In turn, if you want to reap the rewards of this plan, you must stick with the program. Before deciding to pursue this long-term investment strategy, you must be willing to continue investing, so find a mix you are comfortable with and stick to it.