Dollar-Cost Averaging
Dollar-cost averaging (DCA) is investing a fixed dollar amount at regular intervals, regardless of price, so you buy more shares when prices are low and fewer when high.
Instead of investing a lump sum all at once, a DCA investor might put $500 into the same fund every month. Many people do this automatically through 401(k) payroll contributions or recurring brokerage purchases.
Example: you invest $300 a month. In month one the fund costs $30 and you buy 10 shares; in month two it costs $20 and you buy 15 shares; in month three it costs $25 and you buy 12 shares. You have invested $900 for 37 shares, an average cost of about $24.32, below the simple average price of $25.
DCA reduces the risk of investing everything right before a decline and helps build a disciplined habit that removes the pressure of timing the market.
It does not guarantee a profit or protect against losses in a falling market. When someone already has a lump sum available, historical studies have shown that investing it all at once has more often produced higher returns, because markets have tended to rise over time. DCA trades some expected return for lower regret and smoother entry.