Virtually every investor that ever lived wishes he could have bought more stocks then he did when the market was down and less than he did when the market was up. After all, the name of the game is to buy low and sell high, right?

Wouldn’t it be nice if there really was a way to time the market, so you invested heavily when prices were low and cut way back when prices are high? Right now you are probably thinking something along the lines of “Dream on”, but I am here to tell you that there is such a technique and, properly applied, works every single time. If the market is low, you load up; if the market is high, you don’t. Using this system will simplify your investing, remove stress from your life, increase your long term rate of return and remove wrinkles (I made that last one up). What is this magic formula?

Dollar Cost Averaging, and it is both incredibly powerful and incredibly simple. Simply put, you systematically invest the same dollar amount on a routine basis (such as monthly), regardless of what the market is doing. This will cause you to automatically buy fewer shares when the price of the stock is high and to buy more shares when the price is low.

Let’s use an example:

You have researched XYZ company and think it makes sense to invest in it. Lets say the stock of XYZ sells for $10 a share as of today and lets also say we have $100 a month to invest. In the first month, your $100 buys 10 shares; no surprises here. In the next month, the price of XYZ drops to $7.50 a share, but it does not bother you a bit - in fact, you were hoping it would. Your $100 now buys you 13 shares. The next month rolls around and you see the price of XYZ is up to $8.00 a share, which means your $100 will buy 12 shares. Then, the expected uptick happens: The fourth month you are investing, the stock of XYZ soars to $12.50 a share and so you only buy 8 shares.

Lets stop here and look at what we have so far. We have invested $400 and bought 43 shares of stock in XYZ, with a current account value (ignoring fees or commissions) of $537. On the other hand, if we had invested the entire $400 at one time, we would have 40 shares of stock and a current account value of $500. By dollar cost averaging, we managed to increase our rate of return by 7% and we did not spend one extra dime to do it.

If you decide to dollar cost average (and I hope you do) you will be unique among your friends by actually hoping the market goes down, so you can buy more.