Which statement best describes dollar-cost averaging and its potential benefit?

• A. Investing a lump sum at once to maximize market timing.
• B. Involves varying investment amounts based on market conditions.
• C. Involves investing a fixed amount at regular intervals, reducing the impact of market timing and smoothing purchases.
• D. Guarantees higher returns in volatile markets.

Answer: (C)

The idea being tested is dollar-cost averaging: you invest a fixed amount at regular intervals, no matter what prices are doing. This approach removes the pressure to time the market and smooths your buying pattern over time. Because the same dollar amount buys fewer shares when prices are high and more shares when prices are low, your average cost per share tends to come down or at least be smoother in volatile markets. It helps you stay disciplined and avoid emotional decisions during ups and downs.

It doesn’t promise higher returns, and in a steadily rising market a lump-sum investment upfront could outperform, since you’d be invested longer and capture more of the upside. The idea contrasts with strategies that change how much you invest based on market conditions, which try to time the market rather than smooth purchases.