Dollar-cost averaging (DCA)
Investing a fixed amount on a regular schedule — regardless of price — so you buy more shares when prices are low and fewer when high.
Dollar-cost averaging means investing the same dollar amount at the same interval (usually monthly), regardless of market conditions. If you invest $500 a month into an index fund, you buy more shares in months the fund is down and fewer in months it's up. Over time, your average cost per share is below the fund's average price.
DCA's main benefit isn't optimal returns — lump-sum investing at the start typically beats DCA on returns alone, because more money is in the market for longer. DCA's benefit is behavioural. It removes the need to time the market, which is something most people fail at. Automating $500 monthly means you keep investing through downturns, when sentiment says stop.
It also reduces regret risk. Putting $50,000 in at a market peak and watching it drop 30% the next month is psychologically punishing, even if it recovers. Spreading the same $50,000 across 12 months blunts that scenario.
Most retirement accounts (401(k), IRA via auto-transfer) are inherently DCA — you contribute every paycheck. That's a feature, not a bug.
See also
- Compound interest — Interest earned not just on your original deposit, but on the interest that's already been added to it. The engine of long-term wealth.
- Index fund — A mutual fund or ETF that holds every stock in a market index (like the S&P 500) instead of picking individual stocks. Cheap, diversified, boring — and that's the point.
- ETF (Exchange-Traded Fund) — A basket of stocks (or bonds, commodities) that trades on a stock exchange like a single stock. Most ETFs track an index.
- Asset allocation — How you split your investments across asset classes — typically stocks, bonds, and cash. The biggest driver of long-term returns and volatility.
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