Dollar-cost averaging

Also called DCA

Investing a fixed dollar amount on a regular schedule regardless of price, so more shares are bought when prices are low and fewer when high.

What it means

With dollar-cost averaging, an investor puts the same amount into an investment at set intervals, such as every paycheck. Because the dollar amount is fixed, it buys more shares when prices are low and fewer when prices are high, which brings the average cost per share below the simple average of the prices paid when prices vary.

Contributing to a 401(k) from each paycheck is a natural form of this. When a lump sum is already available, historical studies have generally found that investing it all at once has more often come out ahead, because markets have tended to rise over time, but spreading purchases out can reduce regret and the risk of investing just before a drop.

Example

Suppose someone invests $300 a month for three months at share prices of $50, $40 and $60. They buy 6, 7.5 and 5 shares, a total of 18.5 shares for $900, for an average cost of about $48.65 per share versus an average price of $50.

How it’s used

Investing from each paycheck into a retirement plan
Building a position gradually in a volatile market
Easing a nervous investor into the market

Strengths and weaknesses

Strengths

Builds an automatic, disciplined habit
Removes the pressure of timing the market
Lowers the average cost per share when prices fluctuate

Weaknesses

Does not prevent losses in a falling market
With a lump sum on hand, money waiting in cash may miss gains
Per-trade fees, where charged, can add up

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.