Dollar Cost Averaging
How dollar cost averaging works, why your average cost ends up below the average price, how it compares with a lump sum, and a calculator.
Dollar cost averaging calculator
What dollar cost averaging is
Dollar cost averaging means investing the same amount at regular intervals regardless of what the market is doing (Investor.gov). A 401(k) contribution every paycheck is dollar cost averaging. Because a fixed amount buys more shares when prices are low and fewer when they're high, your average cost per share is always at or below the average price (it's the harmonic mean of the prices).
Example: $100 a month at $50, $40, $25, $40 and $50 buys 13 shares for $500: an average cost of $38.46, below the $41 average price. With the price back at $50, they're worth $650, versus $500 for a lump sum invested at the first price.
DCA vs lump sum
That example is a dip and recovery. Markets rise more often than they fall, so investing a lump sum right away has historically come out ahead more often than spreading it out. DCA's real benefits are behavioral: it makes investing automatic, avoids putting everything in at a peak, and removes the temptation to time the market. It doesn't guarantee a profit or protect against loss in a falling market. Project long-term growth with the investment calculator.
Common questions
What is dollar cost averaging?
Investing equal amounts at regular intervals regardless of market ups and downs.
Is dollar cost averaging better than a lump sum?
Not usually in rising markets, but it reduces timing risk and makes investing a habit.
Why is my average cost lower than the average price?
A fixed amount buys more shares when prices are low.
Sources
More investing and trading calculators: Stock Split Calculator · ISO Exercise · Net Investment Income Tax
Related
General information, not financial, tax or legal advice. Check important numbers with the official source before acting on them.