Definition
Dollar-cost averaging automatically buys more shares when prices are low and fewer when prices are high, reducing the average cost per share over time. It eliminates the need to time the market and reduces the risk of investing a lump sum at a market peak. While lump-sum investing produces higher returns 65% of the time (because markets rise more than they fall), DCA reduces volatility and regret risk.
lightbulb Example
Investing $1,000/month: Jan price $50 (20 shares), Feb $40 (25 shares), Mar $45 (22 shares). Total invested: $3,000 for 67 shares. Average cost = $44.78, lower than the $45 average price, because more shares were bought at the lower price.
verified_user Key Points
- Fixed amounts at regular intervals
- Buys more shares when prices are low
- Eliminates market timing decisions
- Lump sum outperforms 65% of the time, but DCA reduces regret