The idea of dollar-cost averaging is to invest your dollars in a stock, exchange-traded fund (ETF) or other security in regular, equal portions over time. Sure, you could invest your cash in a single lump sum, but how do you know you're getting the best price? (Remember: The idea is to buy low.)
In the short term, many stock movements can be random, and even the pros are more likely to fail than succeed when trying to precisely time the market.
Dollar-cost averaging doesn't guarantee you the lowest cost basis on your investments. It can, however, produce a lower average cost basis over a longer period of time than lump-sum investing.
And, again, it's easy to do.
How Dollar-Cost Averaging Works
If you have a 401(k) or similar plan where you automatically invest a percentage of every paycheck in a retirement plan, guess what? You are already dollar-cost averaging. That's because every pay period, you're investing the same amount of cash like clockwork.
But say you want to do this in an IRA or brokerage account. Here's an example of how this would work with an individual stock.
You have $10,000 to invest in, say, grocery chain Kroger (KR). You effectively have two options:
1.) Make a lump-sum investment of $10,000. If shares in the supermarket chain decline soon after you make your investment, however, you might kick yourself over your poor timing.
2.) Dollar-cost average, investing the $10,000 gradually and at regular intervals. For instance, you might purchase $833.33 worth of KR stock every month for 12 months. The beauty of dollar-cost averaging is that if Kroger stock does indeed decline over that period of time, you'll buy KR shares at a lower cost. Thus, you'll get more shares for your $833.33, too.
Here's how dollar-cost averaging with KR would've looked across 2019, assuming you had bought at the closing price of each month:
(Image credit: Getty Images)
In short, DCA lets an investor automatically buy more shares in a company when they're cheaper, and fewer shares when they're more expensive.
Nothing's a Guarantee, Of Course
As with everything in investing, DCA is not without its detractors. Dollar-cost averaging can underperform lump-sum investing at times.
But while systematic investing does not guarantee a profit or protect against loss, it can lift a psychological brick or two off your shoulders. With DCA, you don't need to agonize over whether you should buy right now, or wait for earnings, or wait for a market dip. You just implement the system and keep yourself updated on the stock over time.
Investors also need to consider whether they have the stomach to keep buying when share prices are falling. Dollar-cost averaging doesn't mean to throw good money after bad if the company's narrative has changed considerably. But it does mean being consistent through short-term ups and downs.
That said, DCA can be a good strategy for long-term investors who just want to set it and forget it.
Dollar cost averaging is the practice of investing a fixed dollar amount on a regular basis, regardless of the share price. It's a good way to develop a disciplined investing habit, be more efficient in how you invest and potentially lower your stress level—as well as your costs.
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.
Dollar-cost averaging is the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of a security. Dollar-cost averaging can reduce the overall impact of price volatility and lower the average cost per share.
Dollar-cost averaging is a good strategy for investors with lower risk tolerance since putting a lump sum of money into the market all at once can run the risk of buying at a peak, which can be unsettling if prices fall.
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 is 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.
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.
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.
Dollar cost averaging is a strategy that can help you lower the amount you pay for investments and minimize risk. Over the long term, dollar cost averaging can help lower your investment costs and boost your returns.
But they could end up buying just as stocks are about to drop. Dollar-cost averaging can help take the emotion out of investing. It compels you to continue investing the same (or roughly the same) amount regardless of the market's fluctuations, potentially helping you avoid the temptation to time the market.
The longer the period examined, the more likely that appreciation will occur. This means that if you are averaging into a position over a long time, you may not do as well as if you had simply invested a lump sum at the beginning of the period considered.
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.
Dollar Cost Averaging (DCA) is a common strategy in crypto investing where you regularly invest a fixed amount over time, regardless of the asset's price. It can help reduce the impact of market volatility. Whether it's the best strategy depends on your investment goals, risk tolerance, and market conditions.
Investing a lump sum means that you don't have to try to figure out the best time to make periodic investments. You can set up your portfolio and let it grow. A 2021 Northwestern Mutual Life study showed that investing a lump sum generally outperforms dollar-cost averaging over various periods of time.
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Introduction: My name is Edmund Hettinger DC, I am a adventurous, colorful, gifted, determined, precious, open, colorful person who loves writing and wants to share my knowledge and understanding with you.
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