Dollar-Cost Averaging
Dollar-cost averaging is an investment strategy of investing a fixed dollar amount at regular intervals regardless of price, reducing the impact of volatility over time.
🎬 Video Explanation
Exam Tip
DCA = fixed DOLLARS, varying shares. Reduces average cost in volatile markets.
What is Dollar-Cost Averaging?
Dollar-cost averaging (DCA) means investing a fixed amount of money at regular intervals, regardless of the share price. This approach reduces the emotional aspect of investing and averages out the cost of shares over time.
How It Works
| Month | Investment | Share Price | Shares Bought |
|---|---|---|---|
| 1 | $500 | $50 | 10.0 |
| 2 | $500 | $40 | 12.5 |
| 3 | $500 | $60 | 8.3 |
| 4 | $500 | $45 | 11.1 |
| Total | $2,000 | Avg: $48.75 | 41.9 shares |
Your average cost per share: $2,000 ÷ 41.9 = $47.73
Benefits of Dollar-Cost Averaging
| Benefit | Description |
|---|---|
| Removes Timing | No need to "time the market" |
| Reduces Emotion | Systematic, disciplined approach |
| Buys More When Low | Fixed dollars buy more shares |
| Simple | Easy to automate |
When DCA Works Best
- Long-term investing
- Volatile markets
- Regular income (401k contributions)
- New investors building habits
DCA vs. Lump Sum
Studies show lump-sum investing often outperforms DCA because markets tend to rise over time. However, DCA provides psychological benefits and reduces regret from bad timing.
Automatic Investment Plans
Most 401(k)s and many mutual funds use DCA automatically through regular contributions.
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