What It Means
Dollar-cost averaging (DCA) means putting the same amount of money into an investment on a regular schedule, whatever the market is doing. Because the amount stays fixed, it buys more shares when the price is low and fewer when the price is high. Investor.gov describes it as a way to manage risk through a steady pattern of adding money over a long period.
Try It: Invest the Same Amount at Four Prices
The same amount goes in each month. Change the amount or any month's share price, and the shares and average cost update. Prices are examples only.
| Month 1 | Month 2 | Month 3 | Month 4 |
|---|---|---|---|
Your average cost is below the average price, because the same dollars bought extra shares in the cheaper months.
With the same price every month, your average cost and the average price match.
This shows the math only. It can't tell you where prices go next, and you still lose money if the price ends below your average cost.
How People Say It
- "I just DCA into it every payday."
- "Two hundred a month, no matter what the market does."
- "I'd rather average in than guess the bottom."
The Breakdown
Formula
Shares bought each time = amount invested ÷ price per share. Average cost per share = total invested ÷ total shares.
Worked example. You invest $200 on the same day each month for four months while the share price moves around:
| Month | Invested | Price per share | Shares bought |
|---|---|---|---|
| 1 | $200 | $20 | 1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more |
| 2 | $200 | $16 | 12.5 |
| 3 | $200 | $25 | 8 |
| 4 | $200 | $20 | 10 |
| Total | $800 | 40.5 |
$800 ÷ 40.5 shares = $19.75 average cost per share. The four prices themselves average $20.25.
What the result means. A fixed amount picks up more shares in the cheap month and fewer in the expensive one, so your average cost comes out a little under the average price whenever prices move. It doesn't mean you're ahead. If the price is below $19.75 when you sell, the investment has lost money.
You may already do this. A 401(k)401(k)A retirement plan run through an employer that lets you put part of each paycheck into investments, before tax or as Roth, up to a yearly IRS limit. See more puts a portion of each paycheck into the investments you choose, per Investor.gov, which is the same equal-amounts-on-a-schedule pattern.
Good to Know
FINRA notes that automatic contributions can take the pressure off deciding when to buy and may soften the effect of price swings. On the other side, money held back in cash while you spread out your buying has often earned less than investing a lump sum right away, especially over longer periods. A regular plan doesn't assure a profit or protect against loss in a falling market, and FINRA Notice to Members 98-83 asks firms to disclose exactly that when they advertise these plans.
FAQ
Is dollar-cost averaging better than investing a lump sum?
Not always. FINRA says investing gradually carries lower risk but has often produced lower returns than a lump sum, especially over longer periods, because part of the money waits in cash. It can help limit losses when the market drops sharply.
How often should you invest with dollar-cost averaging?
Investor.gov's definition only asks for equal amounts at regular intervals, so the schedule is up to you. Matching it to payday is an easy way to keep it regular.
Does a 401(k) use dollar-cost averaging?
In effect, yes. A 401(k) invests a portion of each paycheck in the options you pick, so the same amount goes in on a schedule whatever prices are doing. Investor.gov points out that those regular contributions buy fewer shares when prices are up and more when they drop.
Do It in Buhata
Repeating entries
Add your monthly investment as a repeating entry in Buhata's Budget, set for the day after payday, so it shows up on the same date every month.
Open BuhataRelated Terms and Categories
- Automatic savings
Saving that happens on a schedule without a decision each time, through a split direct deposit or a recurring transfer from checking to savings.
- Index fund
A mutual fund or ETF that aims to track the return of a market index, such as the S&P 500, instead of picking investments to beat it.
- 401(k)
A retirement plan run through an employer that lets you put part of each paycheck into investments, before tax or as Roth, up to a yearly IRS limit.
- Micro-investing
Investing small amounts regularly, often a few dollars at a time through an app, usually by buying fractions of shares.
- Brokerage account
An account at a brokerage firm that holds your cash and the stocks, bonds, funds and ETFs you buy and sell through that firm.
Sources
Investor.gov, "Dollar Cost Averaging" (glossary); Investor.gov, "Don't Panic, Plan It!"; Investor.gov, "401(k) Plan" (glossary); FINRA, "The Benefits and Limitations of Dollar-Cost Averaging"; FINRA, Notice to Members 98-83
- www.investor.gov/introduction-investing/investing-basics/glossary/dollar-cost-averaging
- www.investor.gov/additional-resources/spotlight/formerdirectorlorischock-directors-take/dont-panic-plan-it
- www.investor.gov/introduction-investing/investing-basics/glossary/401k-plan
- www.finra.org/investors/insights/dollar-cost-averaging
- www.finra.org/rules-guidance/notices/98-83
Last updated .