Dollar-cost averaging means investing the same amount at regular intervals, such as $500 on the first of every month, without regard to whether the market is up or down. When prices are high, the $500 buys fewer shares; when prices are low, it buys more. Over time your average cost per share settles somewhere below the average price, and you never have to decide whether today is a good day to invest.
Most people already do it without the name. A 401(k) contribution from every paycheck is dollar-cost averaging. So is an automatic monthly transfer to a brokerage account.
A simple example over four months: $500 buys 10 shares at $50, 12.5 at $40, 8.33 at $60, and 10 at $50. You spent $2,000 for 40.83 shares, an average cost of $48.98, even though the average price was $50.
The strategy has a known trade-off. Because markets rise more often than they fall, investing a lump sum all at once has historically beaten spreading it out about two-thirds of the time. Dollar-cost averaging gives up a little expected return for a smoother ride and protection against buying everything at a peak.
For people who receive stock vests or bonuses, the practical question is what to do with a lump. A reasonable middle path is to invest it over three to six months on a fixed schedule. The common mistake is holding cash while waiting for a better price, which is the guessing that averaging was meant to avoid.