Dollar-cost averaging (DCA)
Investing a fixed amount on a schedule regardless of price - buying more shares when they are cheap.
Investing a fixed amount on a schedule regardless of price - buying more shares when they are cheap.
DCA replaces a single decision with a repeated one: the same dollars buy fewer shares when prices are high and more when they are low, so your average cost per share drifts below the simple average of the prices you paid. Behaviourally its bigger value is that it removes the paralysis of trying to pick an entry point - contributions happen on payday whether the market feels expensive or terrified, which is how most people quietly build positions in index funds and retirement accounts.
The honest counterpoint is that lump sums historically outperform DCA about two-thirds of the time in rising markets, because money in the market compounds sooner. DCA is still the rational method when cash arrives gradually (a salary) or when a lump sum would sit in cash indefinitely from hesitation. Automation is the active ingredient - a scheduled transfer is what makes the strategy a system rather than an intention.
Worked example
$500 monthly buys 4 shares at $125 in a strong month and 10 shares at $50 in a weak one: nine more shares for the same dollars, pulling the average cost below the midpoint of those two prices without anyone predicting either move.
Related terms and tools
Expense ratio, DCA vs lump sum, Investment return calculator
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