Dollar-Cost Averaging is a method where you invest a fixed amount of money into a particular investment at regular intervals, regardless of its price. This strategy helps you avoid trying to “time the market” and smooths out the effects of short-term volatility.
Scenario:
Let’s say you decide to invest $200 into an S&P 500 ETF on the first day of every month, for 6 months. Here’s how that might look:
| Month | ETF Price | Amount Invested | Shares Bought | Total Shares |
|---|---|---|---|---|
| Jan | $100 | $200 | 2.00 | 2.00 |
| Feb | $80 | $200 | 2.50 | 4.50 |
| Mar | $67 | $200 | 2.99 | 7.49 |
| Apr | $75 | $200 | 2.67 | 10.16 |
| May | $90 | $200 | 2.22 | 12.38 |
| Jun | $100 | $200 | 2.00 | 14.38 |
- Total Invested: $1,200
- Total Shares Owned: ~14.38
- Average Cost per Share: $1,200 / 14.38 = ~$83.45
Without DCA: What if you invested all $1,200 in January?
You’d get:
- $1,200 / $100 = 12 shares
Compare that to DCA:
- 14.38 shares vs. 12 shares — you actually bought more shares with DCA because you picked up extra during the dip months (Feb, Mar).
Why DCA Works:
- Reduces emotional decision-making: You invest on schedule, not based on fear or hype.
- Helps you buy more when prices are low (like in February/March above).
- Avoids the risk of bad timing: If you’d invested all $1,200 in March, you’d have gotten nearly 18 shares — but would you really have known that was the bottom? Probably not.
When NOT to Use DCA:
- If you have a large lump sum and the market trend is strongly upward, lump-sum investing can perform better than DCA.
- In fast-moving markets (like during a bull run), spreading out investments might mean buying at higher and higher prices.
Bonus: Automating DCA
Most brokers (like Fidelity, Schwab, Robinhood, etc.) allow you to set up automatic investing:
- Choose your ETF or mutual fund
- Set the amount ($100/month, etc.)
- Pick a schedule (monthly, bi-weekly)
- It will auto-invest for you — no stress, no market-watching
Example ETFs Good for DCA:
- VTI – Total US Stock Market
- VOO – S&P 500 Index
- VXUS – International Stock Market
- BND – US Bond Market
Key Takeaway:
DCA is like investing on autopilot — you stick to the plan and let volatility work in your favor.