Dollar-Cost Averaging
Dollar-cost averaging (DCA) is the practice of investing a fixed amount of money at regular intervals, regardless of the asset's price. Because the fixed sum buys more shares when prices are low and fewer when prices are high, it lowers the average cost per share over time and removes the need to time the market. It is the discipline behind most automatic savings and pension plans.
Worked example
You invest $300 a month for 3 months at share prices of $10, $15 and $12. You buy 30, 20 and 25 shares, for 75 shares and $900 total. Average cost = 900 ÷ 75 = $12.00 per share, below the simple average price of (10 + 15 + 12) ÷ 3 = $12.33.
Why it matters
Dollar-cost averaging matters because it removes emotion and guesswork from investing, encouraging steady participation through both rising and falling markets. The common pitfall is overestimating its returns: in a market that mostly rises, investing a lump sum earlier usually beats spreading it out, so DCA is best understood as a tool for discipline and risk management rather than maximising returns.
Frequently asked questions
Is dollar-cost averaging better than investing a lump sum?
Historically, lump-sum investing tends to produce higher returns because markets rise more often than they fall. Dollar-cost averaging is generally better for managing risk and avoiding the regret of investing everything just before a downturn.
How often should I invest with dollar-cost averaging?
Any regular interval works — weekly, monthly or per paycheck. Monthly is most common because it aligns with income, and the key is consistency rather than the exact frequency.
Related terms: SIP (Systematic Investment Plan), Compound Interest