What Is Dollar Cost Averaging?
Dollar cost averaging (DCA) means investing a fixed amount of money at regular intervals, regardless of what the market is doing. Instead of trying to find the perfect time to invest, you invest consistently and let time smooth out the volatility.
If you contribute to a 401(k) from each paycheck, you are already dollar cost averaging. The concept applies to any regular investment schedule.
How It Works
Month 1: Price is $50/share → you buy 10 shares
Month 2: Price drops to $40 → you buy 12.5 shares
Month 3: Price drops to $33 → you buy 15.2 shares
Month 4: Price recovers to $50 → you buy 10 shares
Total invested: $2,000 for 47.7 shares
Average cost per share: $41.93
Current value at $50: $2,385 (up 19.3%)
By buying more shares when prices were low, your average cost ended up below the current price even though the stock just returned to where it started.
Run a DCA vs lump sum comparison with your numbers.
Open DCA Calculator →DCA vs Lump Sum: The Data
Research from Vanguard shows that lump sum investing beats DCA about two-thirds of the time. This makes sense because markets tend to go up, so money invested earlier has more time to grow. However, DCA wins on the psychological front because it dramatically reduces regret and anxiety. If you invest a lump sum and the market drops 20% the next month, most people panic. With DCA, a drop means your next contribution buys more shares at a discount.
The best strategy is the one you will actually stick with. If lump sum investing would keep you up at night, DCA is the better choice for you personally, even if it is mathematically suboptimal.
How to Set Up DCA
- Pick a fixed amount you can invest every month without stress
- Choose a broad market index fund (VTI, VOO, or your 401k equivalent)
- Set up automatic recurring purchases in your brokerage
- Do not look at your portfolio more than once a month
- Increase your contribution by 1% each year or whenever you get a raise