What Is Dollar-Cost Averaging?

Dollar-cost averaging involves regularly investing a fixed dollar amount, regardless of the share price. For instance, you might invest $100 on the 1^st and 15^th of every month.

Maintaining consistency is key to developing disciplined investing habits. Increasing investment efficiency can lower your average cost per share.

For instance, if you invest $200 every month, you will purchase fewer shares when the market is up and more shares when the market is down. Over time, this strategy can lower your average cost per share compared to what you might have paid if you purchased all the shares at once.

How Does Dollar-Cost Averaging Work?

The following example shows how dollar-cost averaging works:

With dollar-cost averaging:

Timing	Amount	Share price	Share purchased
Month 1	$200	$5	40
Month 2	$200	$5	40
Month 3	$200	$2	100
Month 4	$200	$4	50
Month 5	$200	$5	40
	Total invested:	Average cost/share:	Total shares purchased:
	$1,000	$4.20	270

The table above shows that a dollar-cost-averaging strategy enabled a hypothetical investor to capitalize on the price decline in Month 3, significantly reducing the average cost per share. Despite paying $4 or more per share in 4 of the 5 months, the average cost per share was $4.20, and the investor purchased 270 shares.

Without dollar-cost averaging:

Timing	Amount	Share price	Share purchased
Month 1	$1,000	$5	200
Month 2	$0	$5	0
Month 3	$0	$2	0
Month 4	$0	$4	0
Month 5	$0	$5	0
	Total invested:	Average cost/share:	Total shares purchased:
	$1,000	$5.00	200

In contrast, the table above shows that a hypothetical investor who invested in only Month 1 paid a higher cost per share than the other investor. The average cost per share was $5.00, which is higher than $4.20, and the investor purchased 200 shares, which is less than 270.

Dollar-cost averaging is valuable because you cannot predict the best time to invest. Regularly investing fixed amounts over a long period enables you to purchase more shares at a lower cost per share. Investing less and increasing your return on investment (ROI) help attain your retirement goals.

What Are the Benefits of Dollar-Cost Averaging?

The benefits of dollar-cost averaging include:

• Establishing effective investing habits: Setting up regular, automatic contributions to your 401(k) account, 403(b) account, Individual Retirement Account (IRA), stocks, or other investment accounts can help you reach your goals.

• Optimizing investment opportunities: Regularly investing in the market lets you purchase more shares when it’s down. Spending less and buying more increases your ROI.

• Taking advantage of market rebounds: The biggest market gains typically occur in the early stages of recovery. Regular investments can increase your portfolio and positively impact future performance.

• Monitoring risk: Regularly investing according to plan discourages investing in hot stocks or investment fads that increase risk and the potential for loss.

What Are the Risks of Dollar-Cost Averaging?

As with any investing strategy, dollar-cost averaging has risks:

• Profits and protection against losses in a declining market are not guaranteed.

• You might miss out on gains you might have received if you invested a larger amount right away in a stock or fund that significantly increased.

• Dollar-cost averaging tends to produce lower returns over long periods compared to lump-sum investing.

*This information is for educational purposes only.

Do you currently use dollar-cost averaging to guide your investing habits, or do you plan to start? Let me know in the comments!