Dollar Cost Averaging

Investing the same amount every month

Understanding how regular investing can reduce risk and build wealth
Modified

September 7, 2025

Category: Investment Strategy
Difficulty: Beginner

Definition

Investing the same dollar amount on a regular schedule (like $500 every month) no matter what the market is doing.

How It Works

The Simple Process

  1. Pick an amount: Maybe $500 per month
  2. Pick a schedule: Same day each month
  3. Pick an investment: Usually an index fund
  4. Set it automatic: Let it run without thinking about it
  5. Keep going: For years or decades

What Happens

When markets are high: - Your $500 buys fewer shares - You automatically buy less when things are expensive

When markets are low: - Your $500 buys more shares - You automatically buy more when things are cheap

Result: Your average cost per share is lower than the average price over time.

Simple Example

Monthly investment: $1,000 into S&P 500 index fund

Month 1: Market high, $1,000 buys 5 shares at $200/share Month 2: Market crashes, $1,000 buys 20 shares at $50/share
Month 3: Market recovers, $1,000 buys 10 shares at $100/share

Total: $3,000 invested, 35 shares owned Average cost: $3,000 á 35 = $85.71 per share Average market price: ($200 + $50 + $100) á 3 = $116.67 per share

You paid less than the average market price by buying more when it was cheap.

Benefits of Dollar Cost Averaging

Reduces Timing Risk

You don’t have to guess when to invest: - No need to predict market tops or bottoms - Removes pressure of “perfect timing” - Smooths out market volatility over time - Takes emotion out of investment decisions

Builds Discipline

Creates good investment habits: - Forces regular saving and investing - Prevents procrastination - Makes investing automatic - Builds wealth gradually over time

Psychological Comfort

Easier to stick with: - Less stress than trying to time markets - Reduces fear of investing at wrong time
- Feels safer than lump sum investing - Builds confidence through regular action

Dollar Cost Averaging vs. Lump Sum

Lump Sum Investing

Investing all your money at once

Pros: - Historically performs better (markets go up most of the time) - Gets money working for you immediately - Maximum time in market - Simple - just do it once

Cons: - Risk of bad timing (investing right before crash) - Emotionally difficult to invest large amounts - Requires discipline to invest immediately

Dollar Cost Averaging

Spreading investment over time

Pros: - Reduces impact of bad timing - Easier emotionally - Builds investment discipline - Average cost often lower than average price

Cons: - May underperform lump sum historically - Money sits in cash longer - May miss market gains while waiting

When Dollar Cost Averaging Makes Sense

Good Situations for DCA

  • Regular income: You get paid monthly/weekly
  • Just starting: Building investment habits
  • Market anxiety: Worried about investing all at once
  • Large inheritance: Too scared to invest lump sum immediately

When Lump Sum Might Be Better

  • Long time horizon: 10+ years until you need money
  • Emotionally comfortable: Not stressed about market timing
  • Windfall money: Bonus or inheritance you won’t miss immediately
  • Historical evidence: Markets go up about 70% of the time

How to Implement Dollar Cost Averaging

Set Up Automatic Investing

Make it effortless: 1. Choose your investment (index fund is simplest) 2. Set amount you can afford each month 3. Set up automatic transfer from bank to investment 4. Forget about it - let it run automatically

Pick Your Schedule

  • Monthly: Most common, easy to remember
  • Bi-weekly: If you’re paid every two weeks
  • Weekly: More frequent, but more transactions
  • Quarterly: Less frequent, good for larger amounts

Choose Your Investment

Best options for DCA: - Total stock market index fund: Broad diversification - Target date fund: Age-appropriate allocation - S&P 500 index fund: Large company focus - Balanced fund: Mix of stocks and bonds

Common Dollar Cost Averaging Mistakes

Stopping During Bad Markets

The biggest mistake: - Markets crash, so you pause investing - You miss buying at the lowest prices - Defeats the whole purpose of DCA - Fear overrides discipline

Changing Amounts Based on Market

  • Investing more when markets are high
  • Investing less when markets are low
  • This is backwards - should be consistent amounts
  • Turns DCA into market timing

Over-Complicating It

  • Using DCA with 10 different investments
  • Constantly adjusting amounts or timing
  • Checking performance daily
  • Making it more complex than needed

Dollar Cost Averaging Psychology

Why It Feels Good

  • Control: You’re doing something regular and predictable
  • Progress: You see your account growing each month
  • Less regret: If market crashes after you invest, you know you’ll buy more cheap shares next month
  • Habit formation: Creates positive investment behavior

Mental Tricks That Help

  • Automatic setup: Don’t make it a monthly decision
  • Don’t check daily: Look at performance quarterly or annually
  • Focus on shares: Count shares accumulating, not account value
  • Think long-term: DCA works best over many years

The Bottom Line

Dollar cost averaging is perfect for most people because: 1. It’s simple - same amount, same day, every month 2. It’s automatic - no decisions or timing needed 3. It builds discipline - forces regular investing 4. It reduces risk - smooths out market volatility

Best advice: Set up automatic monthly investing into a low-cost index fund and don’t think about it for years.

External Resources