Dollar-cost averaging: strategy and cost examples
Dollar-cost averaging invests a defined amount on a schedule. It reduces timing discretion and spreads entry prices, with results determined by price paths, costs and the asset's long-term performance.
Contents
What DCA changes
Periodic purchases reduce dependence on one entry date and can make a savings plan easier to follow.
Compared with investing available cash immediately, DCA keeps part of the capital uninvested for longer and may lag in a steadily rising market.
Define the rule before testing
Specify amount, frequency, fees, start and end dates, asset, and treatment of cash. Results are sensitive to each choice.
Use the strategy only for assets that still meet an independent investment thesis and risk budget.
A three-purchase example
Assume three purchases of 1,000 at prices of 100, 50, and 100, with fractional units and no fees, taxes, dividends, or cash interest. You acquire 10, 20, and 10 units. Total cost is 3,000 and average purchase cost is 75, calculated as total cost divided by acquired units.
At the third price, the 40 units are worth 4,000. The hypothetical gain is 33.3% on contributed cost; annualized cash-flow performance requires contribution dates.
Cash timing and fees matter
Investing from each paycheck differs from gradually deploying a lump sum already available on day one. A fair comparison must use the same available cash, dates, asset, and costs.
Transaction minimums can make small repeated purchases expensive. A constant percentage fee with no minimum produces the same fee on equal aggregate order value. Price paths and execution costs can still differ.
Frequently asked questions
Does DCA always beat lump-sum investing?⌄
No. The outcome depends on the price path and time spent out of the market.
Does DCA eliminate downside risk?⌄
No. It spreads entries but can continue accumulating an asset that keeps losing value.
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