What is Dollar Cost Averaging? | U.S. Bank (2024)

Key takeaways

Recent market volatility has a lot of investors wondering how to minimize its impact on their portfolio. No one wants to see the balance on their accounts decline. One strategy that can help balance out the volatility is called “dollar cost averaging” (DCA), and it can provide benefits to any type of investor.

“We're often confronted with the question, ‘How do I get started investing?’” says Rob Haworth, senior investment strategy director for U.S. Bank. “You may have a lump sum of cash from the sale of a business or property and are looking to put the money into a diversified portfolio of stocks and bonds. Or you could have a form of continuous cash flow, such as savings from your paycheck, and you want to know how to help it grow. Dollar cost averaging can be a good strategy for both situations.”

How does dollar cost averaging work?

Dollar cost averaging (or DCA investing) is the process of purchasing investments on a regular schedule instead of putting a large sum of money into the market all at once. The amount of money invested using this approach is usually smaller than a lump sum would be, but the contributions will build up steadily over time.

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 Dollar Cost Averaging? | U.S. Bank (1)

How to dollar cost average

For a specific DCA investing example, someone making $150,000 per year who is paid twice a month would receive gross pay of $6,250 per pay period. If they allocated 10% of their pay to a 401(k), they would be saving $625 out of each paycheck. At the end of the year, they would have saved $15,000. The return on the funds inside of their 401(k) would fluctuate based on the market.

“You're putting a regular amount to work in the market over time without regard to price. Sometimes prices will be higher, sometimes they'll be lower, but you essentially continue to accumulate investments.”


Rob Haworth, senior investment strategy director, U.S. Bank

Advantages of dollar cost averaging

Interestingly, research has found that there isn’t a significant financial benefit of dollar cost averaging, such as earning an extra return, when compared to a lump sum investment. The biggest advantages to a dollar cost averaging strategy are the psychological benefits it can provide.

  • Dollar cost averaging helps you feel comfortable with uncertainty. As prices in the market rise and fall, the value of stocks and bonds change, too. Dollar cost averaging helps investors become accustomed to fluctuations. “You're putting a regular amount to work in the market over time without regard to price,” says Haworth. “Sometimes prices will be higher, sometimes they'll be lower, but you essentially continue to accumulate investments.”
  • DCA investing makes “timing the market” obsolete. It can remove the regret an investor may experience if they don’t time the purchase of the stocks or bonds just right. Dollar cost averaging takes a patient approach. It removes the desire to try to time the investment, since there is no way to know the best day to buy. “We're human beings, and we know from behavioral science that we will feel bad and perhaps abandon our plan if we put all our money to work and the market goes down the very next month,” says Haworth. “One of the ways to balance such emotions is consistently putting your money to work and not thinking about having the timing exactly right.”
  • Dollar cost averaging takes the emotion out of the investment decisions. “You aren’t making your decision based on if the market is up or down, or how you feel about what’s happening in the market,” says Haworth. “Time will be on your side, even if you started your investments at a market peak.” He says two years should be enough time to put meaningful amounts of money to work, as investors can take advantage of that ebb and flow of the market.
  • DCA investing removes decision fatigue. With dollar cost averaging, you don’t have to determine how many shares to purchase based on price. It takes away the discipline needed to make regular investments since it creates an investment habit that’s predetermined and automatic.

Is a dollar cost averaging strategy right for you?

Dollar cost averaging can offer a variety of benefits, but there may be times when investing a lump sum into the market is the better choice. It’s important to work with a financial professional to determine the best tools and strategies for meeting your financial goals.

“Your financial professional will work with you to think about your cash flow needs and your ultimate financial goals, setting that ultimate strategic allocation,” says Haworth. “Then they can also figure out your path to getting there. Time in the market can matter more than trying to time the market.”

From working with a financial professional to investing online, learn more about your investing options.

What is Dollar Cost Averaging? | U.S. Bank (2024)


What is Dollar Cost Averaging? | U.S. Bank? ›

Dollar cost averaging is the process of purchasing an investment on a regular schedule. An example is a 401(k), where an employee contributes the same amount each month. There isn't a financial advantage to a dollar cost averaging strategy, apart from the regularity of investing.

How does dollar-cost averaging work? ›

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.

How safe is 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 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.

How often should I dollar cost average? ›

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.

What are the disadvantages of dollar-cost averaging? ›

Cons of Dollar-Cost Averaging

One disadvantage of dollar-cost averaging is that the market tends to go up over time. Thus, investing a lump sum earlier is likely to do better than investing smaller amounts over a long period of time.

How can I double 1000 dollars? ›

One of the easiest ways to double $1,000 is to invest it in a 401(k) and get the employer match. For example, if your employer matches your contributions dollar for dollar, you'll get a $1,000 match on your $1,000 contribution.

How do you make money with dollar-cost averaging? ›

When dollar-cost averaging, you invest the same amount at regular intervals and by doing so, hopefully lower your average purchase price. You will already be in the market when prices drop and when they rise. For instance, you'll have exposure to dips when they happen and don't have to try to time them.

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.

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.

Why i don t recommend dollar-cost averaging? ›

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.

When should I start dollar-cost averaging? ›

Even great long-term stocks move down sometimes, and you could begin dollar-cost averaging at these new lower prices and take advantage of that dip. So if you're investing for the long term, don't be afraid to spread out your purchases, even if that means you pay more at certain points down the road.

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.

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.

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.

Is it best to invest weekly or monthly? ›

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.

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