What is Dollar-Cost Averaging?

Dollar-cost averaging (DCA) is an investment strategy where an investor commits to investing a fixed amount of money at regular intervals, regardless of the asset’s price at each purchase. This approach is designed to reduce the impact of market volatility by spreading purchases over time, rather than investing a lump sum all at once. By consistently investing, DCA encourages disciplined, habitual investing and removes the emotional element of trying to time the market.

The core advantage of dollar-cost averaging is that it can lower the average cost per share over time. When prices are high, the fixed investment amount buys fewer shares; when prices are low, the same amount buys more shares. This process often results in a lower average cost per share compared to making a single lump-sum purchase, especially in volatile markets. For example, if you invest $100 each month and the price of a stock fluctuates, you’ll accumulate more shares when prices drop and fewer when prices rise, smoothing out the effects of market swings.

DCA is particularly useful for investors who want to avoid the risks associated with trying to predict market highs and lows. Even seasoned investors struggle to consistently time the market, and DCA provides a systematic way to invest without needing to make such predictions. It is commonly used in retirement accounts, such as 401(k) plans, where contributions are automatically invested at regular intervals.

However, it’s important to note that while DCA can help manage risk and reduce the emotional stress of investing, it does not guarantee profits or protect against losses in declining markets. The strategy works best when markets are volatile or trending sideways, but in a steadily rising market, a lump-sum investment might outperform DCA. Still, for many investors, the simplicity and discipline of dollar-cost averaging make it a valuable long-term strategy.