Dollar-Cost Averaging: What It Is and How It Works
Dollar-cost averaging means investing a fixed amount on a regular schedule, whatever the price. Here's a worked example, the pros and cons, and how it compares with investing all at once.
6 min read · Updated
Key takeaways
- Dollar-cost averaging (DCA) means investing the same amount on a regular schedule.
- A fixed amount buys more shares when prices are low and fewer when they're high.
- Its biggest benefit is behavioral: it removes the urge to time the market.
- It doesn't guarantee a profit or protect against losses.
Dollar-cost averaging (DCA) is a simple habit: you invest a fixed amount at regular intervals, for example $100 every month, no matter what the price is doing.
If you contribute to a workplace retirement plan from every paycheck, you’re already doing it.
A worked example
Say you invest $100 a month in a fund for five months, and its price moves around like this:
| Month | Price per share | $100 buys |
|---|---|---|
| 1 | $10 | 10 shares |
| 2 | $8 | 12.5 shares |
| 3 | $5 | 20 shares |
| 4 | $8 | 12.5 shares |
| 5 | $10 | 10 shares |
| Total | 65 shares for $500 |
Your average cost per share is $500 ÷ 65 = about $7.69, even though the average of the five prices was $8.20. Because the same $100 bought more shares when the price was low, your average cost ended up below the average price.
Notice something else: the price ended exactly where it started, at $10, yet your 65 shares are worth $650. That’s the effect of buying more during the dip. (This is a made-up example to show the mechanics; real prices don’t always recover.)
Why people like it
- It removes guesswork. Nobody can reliably predict short-term prices. DCA doesn’t ask you to.
- It takes emotion out. When prices fall, a fixed plan keeps going instead of panicking; when prices soar, it doesn’t chase.
- It fits real life. Most people invest from income that arrives monthly anyway.
- It builds a habit. Small, automatic amounts are easier to stick with than big decisions.
The honest downsides
- It doesn’t prevent losses. If a fund keeps falling, buying more of it every month means losing more.
- Investing all at once has often done better. If you already have a lump sum, studies of past market data have found that investing it all at once came out ahead more often than spreading it out, because markets have tended to rise over long periods. DCA trades some of that expected gain for a smoother ride and less regret if prices drop right after you invest.
- Fees can add up. If each purchase carries a fee, many small purchases can cost more. Many brokers now charge no commission for trades, but it’s worth checking.
DCA vs. lump sum, in one line
If money arrives over time, DCA is simply how you invest it. If you have a lump sum, it’s a trade-off between a higher expected result (all at once) and less short-term regret (spread out), and how you’ll feel if prices fall the next day matters.
Common questions
How often should the interval be? Monthly is common because it matches paychecks, but any regular schedule works. What matters most is sticking with it.
Does DCA work with any investment? The idea works with anything you can buy in small amounts. It’s most often used with diversified funds.
The one thing to remember
Dollar-cost averaging turns investing into a routine instead of a guess. It won’t beat the market, but it can help you keep going when the market tests your nerves.
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