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,
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
While it doesn't guarantee gains or protect against losses, using the
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
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
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
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
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
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
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
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
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
New to investing? Dive deeper into the basics.
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
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