Video Lesson
Prefer watching? This video covers the key concepts from this article.
Dollar-Cost Averaging Explained
Dollar-cost averaging (DCA) is an investment strategy where you invest fixed amounts at regular intervals, regardless of market conditions.
How DCA Works
- Set a fixed investment amount
- Choose a regular schedule (weekly, monthly)
- Invest consistently regardless of market
- Your average cost smooths out over time
Benefits of Dollar-Cost Averaging
- Reduces impact of market volatility: You buy more shares when prices are low, fewer when high
- Eliminates timing: No need to guess the 'right time'
- Makes investing automatic: Set it and forget it
- Lowers stress: Market crashes become buying opportunities
DCA vs Lump Sum Investing
Studies show lump sum investing wins about 2/3 of the time. However, DCA:
- Reduces risk of poor timing
- Is psychologically easier
- Is better for regular income investors
Setting Up Your DCA Strategy
- Automate through your brokerage
- Choose index funds or ETFs for simplicity
- Start with whatever you can afford
- Increase contributions over time