“Wonder if this is a good time to invest in stocks?” “Boy, I sure wish I had bought that stock six months ago.” “Trying to guess which direction the market is going sure is frustrating.”
Sound familiar? If you’ve ever agonized over when you should invest, you’ve come to realize it’s never a good idea to try to time the markets. Another strategy? Dollar cost averaging.
Consistency trumps timing
It sounds technical, but dollar cost averaging is quite simple: you invest a consistent amount, week after week, month after month (think payroll contributions going into your 401(k) account) regardless of whether the markets are up, down or sideways. When your investment prices are lower, your fixed dollar amount buys more shares. When prices are up, your dollars buy fewer shares. Over time, your average share price may be lower than if you had invested a large sum all at once.
Let’s assume you invest $100 a month into a mutual fund. The fund’s share price is different each month so the number of shares you buy also goes up and down each month.
| Month | Investment $ | Share price | Shares purchased |
| 1 | $100 | $12 | 8 |
| 2 | $100 | $10 | 10 |
| 3 | $100 | $14 | 7 |
| 4 | $100 | $10 | 10 |
| 5 | $100 | $8 | 13 |
| 6 | $100 | $8 | 13 |
At the end of six months, you’ve invested $600 and you own 61 shares1. Even though the average cost per share over that six months was $10.33, your average cost per share, thanks to dollar-cost averaging2, is $9.83.
If you had invested your entire $600 in month one, you would have spent $12 per share and purchased only 50 shares.. Of course, if you were lucky enough to invest your $600 in month five when the price was down, you’d own 75 shares at an average cost of $8. But no one can accurately pick that low point with every investment they own. Even the experts don’t have a crystal ball. That’s why dollar cost averaging makes sense for so many investors.
Take your emotions out of the game
Dollar cost averaging builds in the discipline to save the same amount on a regular schedule and takes the emotion out of investing. You don’t have to worry about what your investments are doing at any given time and whether you should invest more or less. You invest the same dollar amount each month and let the law of averages work to your advantage. No timing necessary.
1 Shares purchased have been rounded to the next whole share.
2 Dollar cost averaging cannot guarantee a profit or prevent losses in declining and volatile markets.
FAQs
Consistency trumps timing
What is the best time frame for dollar-cost averaging? ›
Another issue with DCA is determining the period over which this strategy should be used. If you are dispersing a large lump sum, you may want to spread it over one or two years, but any longer than that may result in missing a general upswing in the markets as inflation chips away at the real value of the cash.
What interval is best for dollar-cost averaging? ›
Dollar-cost averaging is the practice of putting a fixed amount of money into an investment on a regular basis, typically monthly or even bi-weekly. If you have a 401(k) retirement account, you're already practicing dollar-cost averaging, by adding to your investments with each paycheck.
Is dollar-cost averaging the best way to invest? ›
In a market with major price swings, dollar-cost averaging can be particularly useful, in part because it allows you to ignore the emotional highs and lows of watching the market and trying to time your trades perfectly. When prices are down, your set investment buys more shares; when they are up, you get fewer shares.
Is it better to invest all at once or monthly? ›
Research by Vanguard has found that lump-sum investing outperforms dollar-cost averaging 68% of the time. Dollar-cost averaging is the lower-risk option, and it's a good long-term investing strategy.
Which day of the month is best for DCA? ›
The first and second days of each month have historically had the highest odds of having the lowest price relative to the monthly high price happening on those days.
What is dollar-cost averaging Warren Buffett? ›
“If you like spending six to eight hours per week working on investments, do it. If you don't, then dollar-cost average into index funds.” Buffett has long advised most investors to use index funds to invest in the market, rather than trying to pick individual stocks.
Is it better to invest monthly or weekly? ›
But, if you invest the same amount of money in a year, there is no difference if you invest $250 a week or $1084 a month.
What is the daily DCA strategy? ›
At its core, Dollar Cost Averaging (DCA) is a strategic approach to mitigating risks when purchasing stocks or exchange-traded funds (ETFs). It involves buying smaller amounts at regular intervals, no matter the price, rather than investing a large amount at once.
What is a better strategy than DCA? ›
Simulation results show that the EDCA strategy reliably outperforms the DCA strategy in terms of higher dollar-weighted returns about 90% of the time and nearly always delivers greater terminal wealth for reasonable values of the risk premium.
Cons of Dollar Cost Averaging
- You Could Miss Out on Certain Opportunities. Investing in the same stock or fund every month could cause you to miss out on other investment opportunities. ...
- The Market Rises Over Time. ...
- It Could Give You a False Sense of Security.
Investing set amounts at regular intervals over time—also known as dollar cost averaging—can help you manage timing risk and stick to your long-term plan.
What is the best day of the week to buy stocks? ›
Timing the stock market is difficult, but understanding when to trade stocks can help your portfolio. The best time of day to buy stocks is usually in the morning, shortly after the market opens. Mondays and Fridays tend to be good days to trade stocks, while the middle of the week is less volatile.
Is it better to dollar-cost average or lump sum? ›
Points to know
Dollar-cost averaging may spread the risk of investing. Lump-sum investing gives your investments exposure to the markets sooner. Your emotions can play a role in the strategy you select.
How to dollar-cost average a lump sum? ›
By buying regularly in up and down markets, investors buy more shares at lower prices and fewer shares at higher prices. Dollar-cost averaging aims to prevent a poorly timed lump sum investment at a potentially higher price.
What is the smartest thing to do with a lump sum of money? ›
Build emergency savings
However you choose to invest your lump sum, it may also be a good idea to build an emergency savings pot. Typically, an emergency savings pot should cover about three months' salary and be quickly accessible so that you can use it whenever you need it.
Does dollar-cost averaging work long-term? ›
Investing set amounts at regular intervals over time—also known as dollar cost averaging—can help you manage timing risk and stick to your long-term plan.
Is DCA monthly or quarterly? ›
Dollar cost averaging is investing a fixed amount of money into a particular investment at regular intervals, typically monthly or quarterly. This strategy, with its potential to mitigate timing risk, is most often employed for riskier investments such as stocks and mutual funds (as opposed to bonds or real estate).
Why i don t recommend dollar-cost averaging? ›
The Market Rises Over Time
If you don't increase your monthly investment over time, you may end up with fewer and fewer shares on average. If you can afford to make a lump-sum investment instead of dollar cost averaging, you could come out ahead if your timing is right.
