Dollar-Cost Averaging (DCA)
An investment strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions.
What You Need to Know
Dollar-cost averaging removes emotion from investing. Instead of trying to time the market (which is impossible), you invest the same amount every monthโbuying more shares when prices are low, fewer when prices are high.
Example: Invest $500/month into an index fund
- Month 1: Price $100/share โ Buy 5 shares
- Month 2: Price $80/share โ Buy 6.25 shares (market dip!)
- Month 3: Price $120/share โ Buy 4.17 shares
- Average cost: $98.57/share vs. $100 if you bought all at once
Benefits:
- Reduces impact of volatility
- Removes timing pressure
- Builds consistent saving habits
- Emotionally easier during market crashes
Best For: 401(k) contributions, IRA contributions, and long-term investing (5+ years).
Debate: Lump sum investing historically outperforms DCA 66% of the time, but DCA reduces regret and anxiety.
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/dollar-cost-averaging
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest รท current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.