Many investors feel that the ups and downs of the stock market are impossible to predict.  Many investors believe that, on average, the stock market will provide higher returns than any other investment available to the general public.

If you believe both of those things, then a sensible investment strategy is to buy a set amount of shares in stocks or mutual funds at periodic intervals (say, $50 worth every week).  By pursuing this strategy, the investor smoothes out his or her returns by obtaining an “average” price for their investment.  This helps them be secure in the knowledge that they will get higher returns in the long run than they would via other investments available to them.

While this strategy sounds logical, it may not always be true.  While dollar cost averaging may provide the investor with higher returns than lump-sum investing, it does force the investor to save money on a regular schedule.  Even if the investor’s returns are not optimal, they will at least have saved money.