Investing & Markets

What is Dollar-Cost Averaging?

Dollar-cost averaging means investing a fixed amount on a regular schedule, regardless of the asset’s price. You buy more shares when prices are low, fewer when they’re high. Because the investment amount is fixed, the investor buys more shares when prices are low and fewer shares when prices are high.

This strategy reduces the impact of short-term market volatility and eliminates the need to time the market. Over time, the average cost per share paid by the investor can be lower than the average market price of the asset during that period, maximizing long-term returns.

DCA is a standard strategy for workplace retirement plans, such as 401(k) accounts, where a portion of each paycheck is automatically invested. It builds long-term investing discipline and prevents investors from making emotional decisions during market downturns.

Quick Facts

Investment RuleInvests a fixed dollar amount on a regular, recurring schedule

Market AdvantageEliminates market timing risk and emotional decisions

Buying BehaviorBuys more shares when prices are low, fewer when high

Common ApplicationWorkplace retirement plans (automatic 401k deductions)

PRACTICAL EXAMPLE

An investor commits $500 monthly to an ETF. In month one, the ETF price is $100, purchasing 5 shares. In month two, the price drops to $50, purchasing 10 shares. The average share price was $75, but the investor's average cost per share is $66.67.

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RELATED TERMS

Learn More Key Concepts

StockA financial security representing a fractional share of ownership in a corporation, conveying voting rights and claims on assets.

ETFAn investment fund trading on stock exchanges, holding assets like stocks or bonds, and tracking specific indexes.

PortfolioA collection of financial investments, such as stocks, bonds, cash equivalents, and alternative assets, held by an investor.

Asset AllocationThe investment strategy of dividing a portfolio among different asset classes, such as stocks, bonds, and cash, to balance risk.

Compound InterestInterest calculated on both the initial principal and the accumulated interest of prior periods, driving exponential growth.

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