What Is Dollar-Cost Averaging?
Dollar-cost averaging (DCA) is an investment strategy in which an investor divides the total amount to be invested across periodic purchases of a target asset — reducing the impact of volatility on the overall purchase.
How DCA Works
Instead of investing a lump sum, you invest a fixed amount (say $200) at regular intervals — weekly, monthly, or quarterly. When prices are low, your fixed amount buys more units. When prices are high, it buys fewer. Over time, this averages out your cost per unit.
Example
- Month 1: $200 at $10/share = 20 shares
- Month 2: $200 at $8/share = 25 shares
- Month 3: $200 at $12/share = 16.7 shares
- Average cost: ~$9.84/share vs. a $10.67 average price
Benefits and Limitations
DCA removes the pressure to time the market and helps investors stay disciplined. However, in a strong bull market, a lump-sum investment historically outperforms DCA over the long run.
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