Dollar-cost averaging
Dollar-cost averaging (DCA) is less a trading strategy than a discipline: invest the same amount at regular intervals, whatever the market is doing.
Drag across the chart to read values
How the arithmetic works
A fixed amount buys more units when the price is low and fewer when it is high. The average cost per unit is therefore the harmonic mean of the purchase prices, which is always at or below their arithmetic mean.
| Month | Price | Invested | Units bought |
|---|---|---|---|
| 1 | 100 | 500 | 5.00 |
| 2 | 80 | 500 | 6.25 |
| 3 | 125 | 500 | 4.00 |
| Total | 1500 | 15.25 | |
Average cost: 1500 / 15.25 = 98.36, versus an average price of 101.67.
DCA versus lump sum
When a large sum is already available, studies by Vanguard and others have found that investing it all at once beat spreading it out roughly two-thirds of the time, simply because markets rise more often than they fall. DCA wins mainly on behaviour: it reduces regret and the temptation to time the market.
Where it fits
For someone investing from a monthly salary, DCA is not a choice but the natural pattern. The practical lesson is to automate it and keep costs low.
Practice
Three quick tasks. Pick an answer to check it, or open the answer below each task.
You invest 200 at prices 10, 20 and 40. What is your average cost per unit?
Show answer
17.14. Units: 20 + 10 + 5 = 35. Cost 600 / 35 = 17.14, below the 23.33 average price.
With a lump sum available today, which usually wins historically?
Show answer
Investing all at once. Markets rise more often than they fall, so earlier exposure tends to win.
What is the main benefit of DCA?
Show answer
Behavioural discipline and less regret. It removes timing decisions; it does not remove risk.
Your score: 0 / 0