Dollar-Cost Averaging

Definition

Dollar-cost averaging means committing the same number of dollars to common stocks at regular intervals — monthly or quarterly — no matter what the market is doing. Because a fixed dollar amount buys more shares when prices are low and fewer when they are high, the practitioner "is likely to end up with a satisfactory overall price for all his holdings" without ever having to judge whether now is a good time to buy. Graham classes it as one instance of a broader family he calls "formula investing" — any pre-committed rule that removes the buy/sell timing decision from the investor's discretion.

In the Book

Chapter 1 introduces it as one of three supplementary practices for the defensive investor, alongside buying into established funds and using professional administration. The book grounds the case historically: applying the method to the Dow Jones Industrial Average stocks over a 1929-1948 stretch that included the Great Crash still produced better than 8% compounded annually, evidence that discipline through a bad two decades beats trying to time entry and exit. The commentary extends this into a concrete modern example — an automatic monthly purchase plan through a broker or fund — and stresses that its actual value is behavioral, not mathematical: it works by keeping an investor mechanically buying through crashes that would otherwise trigger panic selling, converting a psychologically hard decision into a pre-made non-decision.

Why It Matters

The mechanism is a general answer to a specific class of problem: when a decision must be made repeatedly under conditions where fear and greed reliably corrupt judgment at the worst possible moments, pre-committing to a fixed rule and removing the discretionary trigger protects against the decision-maker's own foreseeable failure mode. It trades the (unrealized) upside of perfect timing for the (realized) protection against panic-driven mistiming.