Quora Answer: Why is It Best to Invest Regular Amounts into Mutual Funds Rather Than Make Large, One-Off Investments?

The following is my answer to a Quora question: “Why is it better to invest regular amounts into mutual funds, rather than make large, one-off investments?”

What you are talking about is called dollar cost averaging.  The principle is simple enough to understand.  When you make a single large purchase, you have no real way of knowing if you bought while the trend is up or down.  You may have bought those shares at a discount, or a premium, and it is both relative to prices at any other time.  Should you have bought these shares at a premium, and the market subsequently drops, it can take a while for your portfolio to recover its value.  However, buying them at regular intervals averages out the price fluctuations, and lowers the inherent risk of volatility in the market.  This is especially useful for small investors, with modest portfolios, and a low risk tolerance.