Dollar cost averaging | Fidelity (2024)

Dollar-cost averaging is a strategy where you invest your money in equal portions, at regular intervals, regardless of which direction the market or a particular investment is going. In other words, your purchases occur regardless of the changes in price for the stock or other investment, potentially helping reduce the impact of volatility on the overall purchase. This can serve as a risk management trading strategy if you end up buying more when the price is relatively lower and buying less when the price is relatively higher.

Trading using dollar-cost averaging

Let's look at a hypothetical example to illustrate how dollar cost averaging works. Suppose you have $5,000 to invest and have identified a stock you would like to purchase. However, you are unsure when and at what price you would like to buy the stock. Using a dollar-cost averaging approach, you might decide to invest $1,000 a month for 5 consecutive months. In an ideal scenario (assuming you have made the decision to use dollar-cost average), the stock price will decline after your initial trade so that you are dollar-cost averaging in at lower prices (i.e., a lower average stock price compared with the initial price).

Check out the table below to see how this strategy might play out using varying stock prices. Note that this example excludes trading costs and assumes fractional shares enabled.

Trade date Trade amount Stock price Shares bought
January 15 $1,000 $20
February 15 $1,000 $21
March 15 $1,000 $18
April 15 $1,000 $19
May 15 $1,000 $21

After using all of your intended $5,000 for this trade, you purchased 253.4 shares for a dollar-cost average stock price of $19.73. This compares favorably with buying 250 shares if you had used all of the $5,000 to make a lump sum investment at the original $20 per share purchase price.

It's worth noting that you may already be utilizing a dollar-cost averaging strategy. If you have a 401(k) or another type of defined contribution investment plan, your contributions are allocated to one or more investment options on a regular, fixed schedule, regardless of what the market is doing.

Should you use dollar-cost averaging?

Ideally, you would buy an investment at a low point and sell at a high point. But that's not the way things usually happen in real life.

As a risk management strategy, dollar-cost averaging attempts to help address the risk of using all your intended funds for a particular investment at a point in time when the price may be relatively high or volatile. Market timing is exceedingly difficult, even for professional investors. A key advantage of using a strategy like dollar-cost averaging is that it can help mitigate the effects of investor psychology, as it relates to trying to time the market. With a dollar-cost averaging approach, you may avoid making a counter-productive decision due to emotions like fear or greed (like buying more when prices are going up or panic selling when prices are going down). Moreover, dollar-cost averaging might be appropriate if you think there is a possibility that your investment opportunity may decline over the short term (to some extent), but you believe it will rise over the longer term.

The drawbacks of dollar-cost averaging should be apparent. If the price of the investment rises over the course of executing a dollar-cost averaging approach, you will end up buying fewer shares than had you made a lump sum investment at the outset. Suppose the dollar-cost average was $21 using our example above. By the end of making your fixed investments at regular intervals, you would have ended up with 238 shares (compared with 250 shares if you had made a lump sum investment on January 15).

Also, if you are implementing a dollar-cost averaging approach, those funds in waiting are typically held in cash or cash equivalents that earn very low rates of return. Note that this last point does not apply to a scenario like your contributions to a 401(k), because you are making your contributions to those accounts as you earn funds (and not with funds that you already have and are waiting to deploy).

You should also be aware of any trading fees you might incur in your trading account making multiple transactions.

In sum, while dollar-cost averaging may help mitigate some of your risk, it might also mean you could forgo some return potential.

One last point

Dollar-cost averaging only makes sense if it aligns with your investing objectives. If you are investing in a stock or other asset because you like its long-term prospects, and have decided on an amount to invest, then making a lump-sum investment when you make that decision may be the right tactic.

As with any investment decision you make, you should determine if dollar-cost averaging makes sense for both the individual position you are considering using this strategy for, as well as for your overall investing objectives.

Dollar cost averaging | Fidelity (2024)


Does dollar-cost averaging actually work? ›

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.

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.

What are the advantages of dollar-cost averaging responses? ›

It keeps you open to opportunities. Market timing—trying to pinpoint precisely when the market will reach its peak or hit the bottom, and buying and selling accordingly—is almost impossible, even for professional investors. Dollar cost averaging helps ensure that you'll be at the door when opportunity knocks.

What is better than dollar-cost averaging? ›

When you put all your money in at once, you're more likely to see results quickly. This can be a helpful motivator for a beginning investor. You will often see higher returns with lump sum investing compared to dollar-cost averaging.

What are the 2 drawbacks to dollar-cost averaging? ›

Pros and cons of dollar-cost averaging
  • Dollar-cost averaging can help you manage risk.
  • This strategy involves making regular investments with the same or similar amount of money each time.
  • It does not prevent losses, and it may lead to forgoing some return potential.

Is it better to DCA or lump sum? ›

The data shows lump-sum investing often works in favour of investors. But if you are finding it hard to get back into the market, a DCA strategy can help you take that important first step. It can also provide a smoother investment experience.

Why do you think dollar-cost averaging reduces investor regret? ›

Dollar-cost averaging makes it easier to stick to the plan

In hindsight, after the market has recovered, investors often regret not taking advantage of what they now know to be a great buying opportunity.

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.

How often should you buy stocks for 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.

Is DCA the best strategy? ›

A third of the time, dollar cost averaging outperformed lump sum investing. Because it's impossible to predict future market drops, dollar cost averaging offers solid returns while reducing the risk you end up in the 33.33% of cases where lump sum investing falters.

What are the 3 key benefits to using dollar-cost averaging? ›

Three benefits of Dollar-Cost Averaging
  • Emotion. The most common error in investing is investing with emotion. ...
  • Long-Term Plan. Dollar-cost averaging provides you with the ability to seed the market with small sums of investments. ...
  • Avoid Market Mistiming. No one can predict where the market is going at any given time.

Why is lump sum better than dollar-cost averaging? ›

Some analysis suggests that dollar-cost averaging is approximately equivalent to an asset allocation where only 50 to 65 per cent of the portfolio is invested in risky assets and the rest in riskless assets – such as treasury bills – is still suboptimal compared with a lump sum investment into a portfolio with those ...

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.

What is the best investment for $100,000? ›

6 approaches and strategies to invest $100,000
  • Park your cash in an interest-bearing savings account.
  • Max out contributions to retirement accounts.
  • Invest in ETFs.
  • Buy bonds.
  • Consider alternative investments.
  • Invest in real estate.
Apr 3, 2024

What is the best day to DCA? ›

The Best Day to Weekly DCA Bitcoin

Similar to the best time of the day to DCA, we also found a weekly pattern. Since 2010, Mondays have had the highest odds of having the weekly low price relative to the weekly high price falling on this day. This pattern holds up over the last 12 months.

What are the disadvantages of dollar-cost averaging down? ›

Disadvantages of Averaging Down

Averaging down is only effective if the stock eventually rebounds because it has the effect of magnifying gains. However, if the stock continues to decline, losses are also magnified.

Is dollar-cost averaging better than timing the market? ›

Dollar cost averaging is often considered more suitable for novice investors, as it requires less knowledge and experience to implement. Market timing, however, may be more appropriate for experienced investors who have a deeper understanding of market trends and the ability to analyze and interpret market data.

Does dollar-cost averaging guarantee against loss? ›

If the price rises continuously, those using dollar-cost averaging end up buying fewer shares. If it declines continuously, they may continue buying when they should be on the sidelines. So, the strategy cannot protect investors against the risk of declining market prices.

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