Dollar cost averaging (DCA) is an investment strategy where you invest a fixed amount at regular intervals, regardless of the price. It reduces the impact of volatility and removes emotion from investing.
How DCA Works
Instead of investing a lump sum all at once, you spread your investment over time:
- Invest the same dollar amount every week, month, or quarter
- Buy more shares when prices are low
- Buy fewer shares when prices are high
- Over time, your average cost tends to be lower than the average price
DCA Example
You invest $500/month in a stock:
- Month 1: Price $50, you buy 10 shares
- Month 2: Price $40, you buy 12.5 shares
- Month 3: Price $60, you buy 8.3 shares
- Month 4: Price $50, you buy 10 shares
Total: $2,000 invested, 40.8 shares owned
Average cost: $49.02 per share
Average price: $50 per share
Key benefit: DCA removes the pressure of timing the market. You do not need to guess when prices are lowest.
Advantages of DCA
- Removes emotion: Automatic investing prevents fear-based decisions
- Reduces timing risk: You do not risk investing all at a peak
- Builds discipline: Consistent investing becomes habit
- Accessible: Start with small amounts
- Simple: Set it and forget it
Disadvantages of DCA
- Lower returns in rising markets: Lump sum beats DCA when markets go up steadily
- More transaction costs: Multiple purchases mean more fees (though many brokers are now free)
- Money sits uninvested: Cash waiting to be invested earns less
DCA vs Lump Sum
Research shows lump sum investing beats DCA about 2/3 of the time because markets trend upward. However:
- DCA is psychologically easier
- DCA protects against bad timing
- DCA works well when you receive income regularly
When to Use DCA
- Regular income - invest each paycheck
- Nervous about timing
- Long-term investing goals
- Building positions in volatile assets
Track Your DCA Investments
Pro Trader Dashboard tracks your cost basis and average price across all positions.
Summary
Dollar cost averaging is investing fixed amounts at regular intervals. It removes the stress of timing the market and builds disciplined investing habits. While lump sum investing often outperforms, DCA is psychologically easier and reduces the risk of investing everything at a peak.
Learn more: portfolio diversification and starting with $1000.