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

Dollar-cost averaging (DCA) is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of asset price fluctuations. It's often used with stocks, mutual funds and exchange-traded funds (ETFs).

Instead of worrying about market ups and downs, DCA focuses on consistency. By investing on a set schedule, you can build your portfolio over time without trying to time the stock market.

Before getting started, you'll need to decide how much to invest, where to invest and how often. It also will help to understand the pros and cons of investing in lump sums versus regular intervals so you can find the approach that fits your budget and goals.

Rather than trying to predict the best time to invest, the DCA strategy aims to invest the same amount on a regular schedule.

This consistent approach eliminates the common pitfalls of emotional investing. 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.

Imagine your friend decides to invest $6,000 at once in the stock market, at $12 per unit, totaling 500 units.

Now let’s say you’re interested in the stock market, too, but you want to try investing at a slower pace. You decide to use the DCA approach. Instead of investing the full $6,000 at once like your friend, you invest $1,000 once a month for six months.

During this period, the market fluctuates. You’ll have more units when prices are low and fewer units when prices are high. During that six-month period, you’ve purchased 598.24 units with your $6,000.

Dividing the total investment by the number of units ($6,000 divided by 598.24) shows the average price per unit was $10.03, which is less than the $12 investment price in your friend’s scenario.

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

Employer-sponsored retirement plans like 401(k)s typically invest a fixed amount from every paycheck, so you already may be using DCA to help build your savings. Even in the case of a 401(k) plan, there's no one-size-fits-all answer when comparing DCA to lump-sum investing. Each has potential advantages depending on your goals, risk tolerance and how confident you feel about timing 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 means putting your full investment into the market at once, which can feel risky during periods of uncertainty or recessions.

One study compared the performance of DCA and lump-sum investing across various markets over rolling one-year periods between 1976 and 2022. Unlike the results of the $6,000 example mentioned above, the lump-sum approach won between 61.6% and 73.7% of the time. Sometimes, the sooner your money is fully invested, the more opportunity it has to grow. This is because of the market’s general upward trend over time.

So, knowing this, why not choose lump-sum investing each time? Investors simply cannot predict the future. By investing gradually and continuously with DCA, you may find it easier to stay consistent instead of reacting to every news alert about short-term market swings. It can help reduce emotional investing, panic selling and waiting for the “perfect” moment to invest again.

If you’re new to investing, approaching retirement, prefer a hands-off approach or have long-term goals, a DCA strategy may be worth considering. Here’s why.

If you’re worried about things like the right time to invest or knowing when to pull money out of the stock market, DCA investing may be a better option for you as a new investor. You’ll ease in gradually, one paycheck at a time, so you can start building confidence and momentum. This is also a good time to learn more about how the market works.

Set a simple routine to build your understanding:

• Once a week or once a month, read stock market results. Or, choose the same day each time (e.g., Market Mondays).
• Learn a few key terms, such as share price, market trends, geopolitical risk, volatility, volatility index and average costs.
• Download and use your favorite finance app to read at your leisure on the go.
• Choose a beginner-friendly financial magazine or podcast to learn more about stocks.

As a new investor, you can focus on learning how the market works without feeling pressure to move money in and out.

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. It is totally up to you whether you want to be more active by checking your account through your provider's portal or app or take a more hands-off approach and let your contributions continue on their own.

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.

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 managing 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.

To get started building DCA into your investment strategy, focus on creating a simple, repeatable plan. These steps can help you get set up.

1. Choose your investment amount
Pick a fixed dollar amount you can contribute consistently, even if it’s $50 or $100 a month. The key is to keep that amount the same, regardless of how the market is performing. Choosing something realistic for your budget makes it easier to stick with over time.

2. Decide what to invest in
DCA is often used with diversified investments like index funds, ETFs or mutual funds. These help spread your risk across many companies rather than relying on a single stock. This can make your overall investment experience more stable over time.

3. Set your schedule
Monthly contributions often align with paychecks, but weekly or biweekly schedules can work just as well. The specific timing matters less than staying consistent over time. Pick a schedule that fits naturally into your routine so it becomes part of your normal financial habits.

4. Automate it and leave it alone
Most brokerages, 401(k) plans and IRAs allow you to set up recurring contributions. Automating your investments can help remove decision-making from the process. Once your plan is in place, try to stick with it, even when the market drops. That’s often when DCA can be most effective.

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.

None of these situations means DCA is a bad strategy. The details of your life and goals just matter more. A good financial plan works with your circumstances, not against them.

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.