How is market volatility potentially reduced through dollar-cost averaging?

Dollar-cost averaging is a strategy that involves consistently investing a fixed amount of money into a particular investment or portfolio, regardless of market conditions. This method is effective in reducing market volatility's impact on an investor's portfolio for several reasons.

When an investor commits to buying a consistent dollar amount of an asset at regular intervals, they end up purchasing more shares when prices are low and fewer shares when prices are high. This results in a lower average cost per share over time compared to making a lump-sum investment, where market timing can lead to less favorable outcomes if the investment is made right before a downturn. The practice of buying fixed amounts smooths out the effects of market fluctuations, thereby reducing the risk of making poor investments based on short-term market volatility.

The other options focus on strategies that either avoid investing entirely during volatility or alter the nature of investments without directly addressing the consistent purchase strategy that defines dollar-cost averaging. Buying only high-performing stocks or diversifying into non-stock investments can help with overall risk management but do not fundamentally involve the principle of consistently investing fixed amounts to counteract the effects of volatility.