You’ve taken a look around and see nothing but economic uncertainty, so you’ve decided to learn about long-term investing and personal finance this year. So far, you’ve mastered savings, and you’ve dipped your toes into the waters of what it looks like to make an investment plan. However, some concepts are harder to grasp than others, such as the benefits of dollar-cost averaging.
Learn More: How To Get a 10% Return on Investment (ROI): 10 Proven Ways
Consider This: 4 Low-Risk Ways To Build Your Savings in 2025
If your initial attempts at learning what dollar-cost averaging is — and why it should matter to you — have yielded a bunch of jargon and formulas that made your head spin, you’re not alone. But it doesn’t have to be that way, at least not anymore. Thanks to your old pal AI, now you can just ask ChatGPT to explain it in plain English.
A good side note is to remember that ChatGPT is by no means perfect, and you should always treat it as the foundation for further research. But ask it to explain dollar-cost averaging like you’re 12, and you’ll get a surprisingly clear and actually comprehensible answer.
Trending Now: Suze Orman’s Secret to a Wealthy Retirement–Have You Made This Money Move?
Take a Trip to the Candy Shop
ChatGPT wastes no time offering an analogy that most 12-year-olds — not to mention grown-ups brushing up on money matters — can understand: using your allowance to buy candy.
Let’s say you get $10 every week (thanks, parental units!) and you want to use it to satisfy your sweet tooth. Ah, but the short-term purchase price of candy changes from week to week. Sometimes it’s $1, other times it’s $2. When you’re really lucky, it’s just $0.50.
You decide, to heck with waiting for the cheapest or most “perfect” week to buy. You’re going to invest regularly and spend your $10 on candy every week, no matter the price or the market timing for sweets. Naturally, when the candy is cheaper, you get more pieces. When it’s more expensive, you get fewer.
As ChatGPT explains: “Over time, your average cost per candy balances out. You didn’t spend all your money when candy was expensive, and you didn’t try to guess the perfect week to buy.”
That, in essence, explains how dollar-cost averaging works.
Find Out: Money Influencer Delyanne Barros: Why Boring Could Be Best for Investing
But How Does This Apply to the Stock Market?
One of the biggest stressors surrounding the stock market is this idea that there’s a right time to invest — and if you miss that time, you’re doomed. Taking the same approach to real-life investing that you did to your hypothetical candy money means you don’t have to worry about timing the market just right for a lump sum investment.
In other words, employing dollar-cost averaging in your investing strategy means investing a fixed amount of money on a regular schedule — say, weekly or monthly. You’ll buy more shares when prices are low and fewer when prices are high. Over time, this strategy can help reduce the average price you pay per share.
Asking for a Real-Life Example
Playing around with candy might be, well, child’s play, compared to the real-life stakes of smart and regular investing. When prompted, ChatGPT offered an example using a fictional video game company where you’ll invest $100 a month. It creates a simple scenario showing how the stock price could change over four months:
Breaking it down, you spent $400 over four months and bought 45 shares. That means your average cost per share is $400 divided by 45 — about $8.89 per share.
“Even though the price went up and down, you didn’t try to guess the best time to buy. You just kept investing the same amount. That’s dollar-cost averaging in action!” ChatGPT concludes.
You weren’t stressing about when to buy, and you got more shares when prices were low. Best of all, you didn’t spend all your money when the stock was at its most expensive — all of which helps alleviate risk, especially in a more volatile market.
And here’s the kicker: Your average cost per share came out quite a bit lower than the stock’s peak price. By spreading out your investment, you avoided overpaying during the high points and let the lower prices bring your average down.
Caitlyn Moorhead contributed to the reporting for this article.
More From GOBankingRates
-
3 Luxury SUVs That Will Have Massive Price Drops in Summer 2025
-
4 Things You Should Do if You Want To Retire Early
-
7 Wealth-Building Shortcuts Proven To Add $1K to Your Wallet This Month
-
5 Things You Must Do When Your Savings Reach $50,000
This article originally appeared on GOBankingRates.com: I Asked ChatGPT To Explain Dollar-Cost Averaging Like I’m 12 — Here’s What It Said
