How it works
Dollar-cost averaging (DCA) is investing a fixed amount of money on a regular schedule, for example $100 a month, no matter what the market is doing. Most workplace retirement plans work this way without you thinking about it.
A simple example
Say you invest $100 each month in a fund. In month one the price is $10, so you buy 10 shares. In month two it falls to $8 and you buy 12.5 shares. In month three it recovers to $12 and you buy about 8.3 shares. Over three months you invested $300 and own about 30.8 shares, an average cost of about $9.73 per share, lower than the simple average of the three prices ($10).
The numbers are made up to show the mechanics. Real results depend on real prices.
Why people like it
- It removes the pressure of picking the perfect moment to buy, which nobody can do reliably.
- It builds a habit of investing steadily.
- It limits the regret of putting a large sum in just before a drop.
The trade-offs
Historically, markets have risen more often than they have fallen, so putting a lump sum to work immediately has often done better than spreading it out. DCA trades some of that expected gain for a smoother ride. It also does not protect you from long declines. If you receive money every month from your paycheck, DCA is simply how you invest. If you already have a lump sum, think about which risk bothers you more: being wrong at the start, or missing out.
Quick answers
Is dollar-cost averaging better than investing a lump sum?
Often, not on average, since markets tend to rise over time. But it can feel easier and lower-stress. The best plan is one you will actually stick with.