Dollar-cost averaging is an investment strategy in which a person invests the same fixed amount in the stock market or in mutual funds over a long period. If a person invests the same amount of money, the investor will buy more stock when the market is down and have more shares when the market goes back up. This strategy is called pound-cost averaging in the United Kingdom or the cost-average effect internationally.

The dollar-cost averaging strategy works better when investments are in a mutual fund or just one or two stock types, rather than spread across multiple investments. The key to making money with dollar-cost averaging is to buy a larger number of shares when the market is down and wait for them to increase in value. Buying a large number of shares can be more difficult if the total investment amount is spread too thinly.

One of the most prominent proponents of dollar-cost averaging is Suze Orman (www.suzeorman.com ), who believes dollar-cost averaging is a way to reduce risk. She proposes that risk is reduced with dollar-cost averaging, because money is invested slowly. This rate allows the investor to buy stock at several times throughout a given period when the markets are down, which ultimately means that more stock is likely to be purchased through this method than if a lump sum were invested.

However, opponents of this theory, such as Dave Ramsey (www.daveramsey.com), believe dollar-cost averaging is mainly psychological. Ramsey believes no aversion of risk exists, but investors simply feel better when the market dips if they have invested only small amounts of money, rather than seeing their one large amount drop.

Some financial experts take a more moderate approach, like Bill Jones from Dataquest. Jones believes in dollar-cost averaging, but only when the money is invested over 6-to-12 month periods. Despite the debate, many investors continue to be proponents of dollar-cost averaging.