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Dollar-Cost Averaging

In short

Investing fixed amounts regularly — reduces timing risk and averages your cost

Instead of trying to pick the perfect time to invest, invest $200 every month regardless of price. When prices are low, you buy more shares. When high, you buy fewer. Over time, this averages out your cost and removes timing anxiety.

DCA (Dollar-Cost Averaging) involves investing fixed dollar amounts at regular intervals. It reduces timing risk and eliminates the need to predict market tops/bottoms. Studies show DCA underperforms lump-sum investing in steadily rising markets but protects against investing at market peaks.

Formula

Average Cost = Total Invested ÷ Total Shares Purchased

Related concepts

  • Compounding — If you earn 10% on $1,000, you have $1,100. Next year, you earn 10% on $1,100 = $110. Over 30 years, $1,000 becomes $17,449. Einstein called compounding the 'eighth wonder of the world.' Time is your greatest advantage.
  • Rebalancing — Rebalancing forces you to sell what's risen (expensive) and buy what's fallen (cheap) to restore your target mix. It's systematic discipline — the opposite of the emotional tendency to chase winners.
  • Time Horizon — Investing for 30 years? You can weather market crashes because you have time to recover. Investing for 3 years? You need safer investments because a crash could derail your goals. Time horizon is the single biggest factor in portfolio design.
  • Index Fund — An index fund automatically owns every stock in an index (like the S&P 500). No stock picking. Very low fees. You get the market's return. Studies show 80-90% of active fund managers underperform index funds over 15 years.