The Pros and Cons of Dollar-Cost Averaging (2024)

When thinking about investing, one consideration is whether to invest funds all at once or over a period of time. If you choose the latter route, you might be opting for an investment strategy called dollar-cost averaging.

With dollar-cost averaging, you invest your money in equal portions, at regular intervals, regardless of the ups and downs in the market.

Let’s say you receive a bonus or have saved up $10,000 to invest. Instead of investing that amount all at once, with dollar-cost averaging you might split that $10,000 into 10 parts and invest $1,000 a month for 10 months.

You might already be engaging in dollar-cost averaging and not even know it. If you have a 401(k) or another type of defined contribution plan, your contributions are allocated to one or more investment options on a regular, fixed schedule, regardless of what the market is doing. Every time this happens, you’re dollar-cost averaging.

Before you start divvying up your money, here are three things to know about dollar-cost averaging:

Why Might Someone Consider Dollar-Cost Averaging?

It would be great if we could buy stocks, or other types of investments, when the market is low and sell when the market is high. Unfortunately, efforts to "time the market" often backfire, and investors end up buying and selling at the wrong time.

When stocks go down, people often get fearful and sell. Then, when the market goes back up, they might miss out on potential gains. On the flip side, when the stock market goes up, investors might be tempted to rush in. 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.

When you dollar-cost average, you buy more shares of an investment when the share price is low and fewer shares when the share price is high. This can result in paying a lower average price per share over time.

And by wading in, as opposed to handing over your money all at once, dollar-cost averaging can help you limit your losses in the event the market declines.

What Are the Potential Downsides of Dollar-Cost Averaging?

Dollar-cost averaging can be a helpful tool in lowering risk. But investors who engage in this investing strategy may forfeit potentially higher returns. With dollar-cost averaging, you’re holding onto your money as cash longer, which has lower risk but often produces lower returns than lump sum investing, especially over longer periods of time.

If the market goes up during a period when you’re dollar-cost averaging, you might miss out on the potential gains you could have had, had you invested right away in one fell swoop.

Of course, this doesn’t apply to something like your 401(k) because, in that situation, you’re investing the money as you earn it, not holding money in cash until a later date.

Also, keep in mind that if you engage in dollar-cost averaging, you might encounter more brokerage fees. These fees could erode your returns. And you also need to be disciplined with that money that’s sitting on the sidelines in order to actually eventually invest it and not erode it with purchases.

What’s the Bottom Line for Investors?

As is the case in all aspects of investing, it’s important to consider potential returns as well as your tolerance for risk.

Investing all of your money right away might yield higher returns than dribbling out smaller amounts over time.

But if you’re looking to reduce your risk and control your emotions, or you’re concerned about volatile market conditions, then dollar-cost averaging could be a viable strategy—even if that means forfeiting some potential upside. If your main concerns are reducing short-term downside risk and avoiding feelings of regret after a potential loss, dollar-cost averaging might be right for you.

The Pros and Cons of Dollar-Cost Averaging (2024)


The Pros and Cons of Dollar-Cost Averaging? ›

Dollar cost averaging is an investment strategy that can help mitigate the impact of short-term volatility and take the emotion out of investing. However, it could cause you to miss out on certain opportunities, and it could also result in fewer shares purchased over time.

What are the downsides of dollar cost averaging? ›

A disadvantage of dollar-cost averaging includes missing out on higher returns over the long term.

What are the advantages of dollar cost averaging? ›

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.

Is dollar cost averaging a good strategy now? ›

DCA is a good strategy for investors with lower risk tolerance. If you have a lump sum of money to invest and you put it into the market all at once, then you run the risk of buying at a peak, which can be unsettling if prices fall. The potential for this price drop is called a timing risk.

How often should you invest with 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.

How safe is dollar-cost averaging? ›

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.

What is the best dollar-cost averaging strategy? ›

The strategy couldn't be simpler. Invest the same amount of money in the same stock or mutual fund at regular intervals, say monthly. Ignore the fluctuations in the price of your investment. Whether it's up or down, you're putting the same amount of money into it.

Which is better lump-sum or dollar-cost averaging? ›

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.

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

Lump-sum investing may generate slightly higher annualized returns than dollar-cost averaging as a general rule. However, dollar-cost averaging reduces initial timing risk, which may appeal to investors seeking to minimize potential short-term losses and 'regret risk'.

What is a downside of the share price dropping? ›

Key Takeaways. When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Drops in account value reflect dwindling investor interest and a change in investor perception of the stock.

Does Warren Buffett use dollar-cost averaging? ›

Among the numerous investment strategies available, dollar-cost averaging is a popular and widely used approach. Its proponents range from Warren Buffett to average investors.

Is it better to invest monthly or annually? ›

Over shorter timeframes, it tends to make little difference whether you invest a lump sum or split it into regular amounts. In a given year, for instance, it is much closer to 50/50 whether a lump sum at the start works out better than splitting it up over the twelve months.

Is it better to invest monthly or weekly? ›

As you saw, investing once a month gets you all the goodies. Plus, most people have a monthly income cycle, so monthly SIPs perfectly gel with that frequency. So, by all means, you can go for monthly SIPs, as the above data shows that daily or weekly SIPs don't enhance your returns significantly.

Why dollar-cost averaging doesn t work? ›

When you're doing dollar cost averaging, you're not keeping your money in the market over the full period of time. You are keeping much of your money out of the market for much of the time. So, you're not getting the full benefit of long-term investing.

Does dollar-cost averaging work in a recession? ›

The dollar-cost averaging method works best over the long term for investors who do not want to worry about how their investments are performing. If you are going to hold stocks during a recessionary period, the best ones to own are from established, large-cap companies with strong balance sheets and cash flows.

What is dollar-cost averaging most often used by? ›

One of the most common dollar cost averaging examples is when an employee signs up for a workplace retirement plan, such as a 401(k). They agree to contribute a set percentage of their income into the retirement plan each pay period.

What is one downside to using dollar-cost averaging potential for paying more in transaction costs over time? ›

Dollar cost averaging also means making more transactions, which can result in higher brokerage fees. You won't pay transaction fees if you invest in the TSP or an index fund that doesn't charge commissions. But you may have to pay fees if you make monthly stock or mutual fund purchases.

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 dollar-cost averaging riskier than lump sum investing? ›

Investing all at once through lump-sum investing can mean higher returns, so choose this method if your primary concern is performance. But dollar cost averaging can help you gradually increase your exposure to risk over time, which can help you lower stress and avoid regret.

Is dollar-cost averaging riskier than lump sum? ›

A Lump Sum investment into a 60/40 (stock/bond) portfolio has the same level of risk as Dollar Cost Averaging into the S&P 500 over 24 months, yet the Lump Sum investment is more likely to outperform!

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