How does dollar cost averaging help mitigate investment risk?

Dollar cost averaging helps mitigate investment risk by spreading investments over time. This strategy involves regularly investing a fixed amount of money into a particular investment, such as stocks or mutual funds, regardless of the share price. By doing so, an investor purchases more shares when prices are low and fewer shares when prices are high.

This approach minimizes the impact of market volatility on the overall investment. Over time, the average cost per share can become lower than if a single large investment was made at a potentially unfavorable time, such as a market peak. Consequently, dollar cost averaging allows investors to build their investment steadily without trying to time the market, which can often lead to emotional decision-making and increased risk.

The other options suggest scenarios that either do not effectively reduce risk or do not accurately represent the mechanics of dollar cost averaging. For instance, increasing the invested amount does not inherently reduce risk; rather, it could amplify exposure if the market declines. Buying at high prices contradicts the principle of dollar cost averaging, as its goal is to smooth out purchase prices over time. Additionally, while minimizing transaction fees could be beneficial, it is not a primary function of dollar cost averaging itself, as this strategy focuses more on timing and consistency rather than cost.