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Dollar-cost averaging explained: How consistent investing may reduce risk while building your portfolio

October 1, 2025
Last revised: October 1, 2025

Trying to time the market can be stressful and unpredictable. Dollar-cost averaging offers a simple, consistent way to build your investment portfolio over time.
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Key takeaways

  1. Dollar-cost averaging (DCA) means investing a fixed amount on a regular schedule.
  2. DCA can reduce emotional investing and market timing risks.
  3. It can work well for long-term goals and automated contributions.
  4. DCA may yield lower returns than lump-sum investing during sustained bull markets.
  5. Consistency is key for dollar-cost averaging to be effective.

When investing, you have many strategies to consider. But, before choosing an approach, you'll need to decide how much to invest, what to invest in and when.

As you learn more, you may come across a strategy called dollar-cost averaging (DCA). It's a way to reduce the impact of short-term market volatility by investing consistently.

Why do so many investors rely on it to stay disciplined during market ups and downs? Here's how it works.

What is dollar-cost averaging?

Dollar-cost averaging (DCA) is a disciplined investment strategy that involves investing a fixed dollar amount at regular intervals—regardless of asset price fluctuations. It's often used with stocks, mutual funds and exchange-traded funds (ETFs).

Instead of trying to guess the best time to invest, you commit to consistent contributions — such as weekly or monthly. This approach can help reduce the emotional side of investing by making it a habit instead of a reaction to the stock market.

While it doesn't guarantee gains or protect against losses, using the dollar-cost averaging approach may reduce risk and help you stay invested through volatility or uncertainty.

How does dollar-cost averaging work?

Rather than trying to predict the best time to invest, dollar-cost averaging helps you stay consistent regardless of the market's performance. You invest the same amount on a regular schedule, such as $150 a week, whether prices are up, down or somewhere in between.

This steady approach can mitigate behavioral biases like fear, greed and market timing—common pitfalls in emotional investing. It's a way to make investing something that's routine rather than reactive.

Since your contribution amount stays the same, you automatically buy more shares when prices are low and fewer when they're high. That can smooth out your average cost over time and help reduce the pressure to get it right when investing with a lump sum.

DCA also works well with automation. You can set up recurring transfers or retirement plan contributions, making it easier to stick to the strategy and stay invested through bear or bull market swings.

Example of dollar-cost averaging over six months

Imagine an investor has $6,000 to invest. If they invest the full amount at once, at $12 per unit, they would buy 500 units ($6,000 divided by 12).

Let's say another investor decides to use a dollar-cost averaging approach. But instead of investing the full $6,000 at once, they invest $1,000 a month over six months.

During this period, the market fluctuates. As prices rise and fall, the investor may buy more units when prices are low and fewer units when prices are high. Over the six months, they invested a total of $6,000 but purchased 598.24 units.

Dividing the total investment by the number of units ($6,000 divided by 698.24) shows the average price per unit was $10.03 — over $2 less than in the lump-sum scenario.

In this case, the investor using DCA ended up with more units and avoided the stress of trying to buy at the perfect moment.

Month

Investment

Unit price

Units purchased

1

$1,000

$12

83.33

2

$1,000

$10

100

3

$1,000

$9

111.11

4

$1,000

$8.50

117.65

5

$1,000

$10.50

95.24

6

$1,000

$11

90.91

Total

$6,000

$10.03

598.24

This example of dollar-cost averaging highlights how this approach can support long-term investing by encouraging consistency, even when markets feel unpredictable.

Dollar-cost averaging vs. lump-sum investing: Pros, cons and when to use each?

There's no one-size-fits-all answer when comparing dollar-cost averaging to lump-sum investing. Each has potential advantages depending on your goals, risk tolerance and how confident you feel about entering the market.

Lump-sum investing may lead to higher returns over the long term, especially in rising markets, because your money is invested sooner and has more time to grow. However, it also can expose your entire investment to the market at once, which can be stressful during periods of economic uncertainty or recessions.

DCA may help reduce that financial pressure. It can be helpful if you're investing during a choppy market, want to ease into investing gradually or are contributing regularly through a 401(k). Employer-sponsored retirement plans like 401(k)s typically invest a fixed amount from every paycheck, so you may already be using dollar-cost averaging to help build your savings.

While dollar-cost averaging may not outperform lump-sum investing in every scenario, it can be a valuable approach for those who prefer a steady, consistent rhythm to investing. It also helps take the guesswork out of timing the market, something even experienced investors struggle to get right.

Ultimately, the right option depends on your comfort level, the state of the market and whether you're investing a lump sum or contributing over time.

Who should consider dollar-cost averaging?

Dollar-cost averaging can be a good fit for many investors, especially those who want to build consistent positive habits. Here's a closer look at when this strategy may be worth considering:

You're new to investing or nervous about getting started

If you're just starting out, committing a large amount all at once can feel risky or overwhelming. DCA helps you ease in gradually, one paycheck at a time, so you can start building confidence and momentum. It helps remove the pressure of finding the perfect time to invest or worrying about pulling money out of the stock market and replaces it with a plan you can stick to.

You have recurring income and want a hands-off approach

Many people already use this strategy. If you're contributing to a 401(k) or individual retirement account (IRA) regularly, you're likely investing the same amount on a schedule, regardless of market conditions. This method can work well with salaried income, and it's easy to set up via automatic transfers or payroll deductions.

You're retired or managing a windfall

Retirees often want to preserve their savings and avoid unnecessary risk. If you don't need all of your money at once, DCA can help protect against the risk of investing a large lump sum right before a market downturn, especially if you're managing a large distribution from a pension, insurance payout or inheritance.

You're investing for long-term goals

If you know you'll need funds in a few years for a wedding, home renovation or college expenses, DCA can help you steadily save while minimizing risk. By investing consistently, regardless of market performance, you can stay focused on the bigger picture.

While DCA can be a part of a solid investment strategy, you also need to consider a diversified portfolio that's tailored to your goals and risk tolerance.

When dollar-cost averaging might not be ideal

DCA can be a solid strategy, but it's not right for every investor or situation. Here are a few scenarios where it may fall short:

  • You're investing during a strong bull market. If the market is steadily rising, investing a lump sum upfront could generate higher returns because your full investment has more time to grow.
  • You want quick returns. DCA is typically designed for long-term goals. If you're hoping for fast gains or immediate income, this approach may feel too slow or cautious.
  • You're investing in a declining asset. Spreading purchases over time won't protect you if the investment continues to lose value, especially if you're purchasing speculative assets or assets with weaker fundamentals.
  • You struggle with consistency. DCA works best if you commit to regular contributions. If your income is irregular or you're likely to pause investments, it may not be the best fit.

While dollar-cost averaging can help keep decisions grounded and not reactive to market volatility, it's important to weigh these limitations before committing to the strategy.

Want help building a dollar-cost averaging strategy?

DCA can be a good way to invest consistently, reduce emotional decision-making and stay focused on long-term goals. But it isn't ideal for everyone. A Thrivent financial advisor can help you determine if it's the right fit, tailor the approach to your specific situation and integrate it into your broader investment plan.

Dollar-cost averaging FAQs

What is dollar-cost averaging in simple terms?

DCA is an investing strategy where you contribute a fixed amount of money regularly, regardless of the asset's price. Over time, this can help reduce the ups and downs of investing during market volatility and build your savings consistently.

How do I calculate my average cost?

To find your average cost per unit, divide your total amount invested by the total number of units you purchased. This gives you the blended price across all your purchases.

Is DCA better than buying the dip?

Buying the dip means trying to time your investments around short-term price drops, which can be risky and unpredictable. Dollar-cost averaging offers a more consistent, long-term approach that helps you stay invested without needing to guess the best time to buy.

Can I use DCA with crypto or ETFs?

Yes, dollar-cost averaging can be used across many asset types, including cryptocurrencies, ETFs, mutual funds and stocks. Just make sure your platform or brokerage supports scheduled transfers or recurring investments of fractional shares.

Does dollar-cost averaging help reduce risk?

DCA may help reduce the risk of investing a lump sum right before a market drop by spreading your purchases out over time. However, it doesn't protect you from losses if the asset continues to decline, and it may result in lower returns during rising markets.

Dollar cost averaging does not ensure a profit, nor does it protect against losses in a declining market. Because dollar cost averaging involves continuous investing, investors should consider their long-term ability to continue to make purchases through periods of low price levels and varying economic periods.

Hypothetical example is for illustrative purposes. May not be representative of actual results.

Concepts presented are intended for educational purposes. This information should not be considered investment advice or a recommendation of any particular security, strategy, or product.

Investing involves risk, including the possible loss of principal. The product prospectus, portfolios' prospectuses and summary prospectuses contain more complete information on investment objectives, risks, charges and expenses along with other information, which investors should read carefully and consider before investing. Available at thrivent.com.
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