Dollar-Cost Averaging: A Simple Strategy to Build Wealth Over Time

Dollar-cost averaging (DCA) is an investment strategy where you invest a fixed amount of money at regular intervals—regardless of whether the market is up or down. This approach eliminates the pressure of timing the market, reduces emotional decision-making, and helps you build wealth steadily over time. If you contribute to a 401(k) through automatic payroll deductions, you're already using dollar-cost averaging without realizing it. Research from Charles Schwab shows that even investors with terrible timing beat those who stayed in cash by over $100,000 across 20 years, proving that consistent investing matters far more than perfect timing. Whether you're just learning how to start investing or looking to refine your strategy, understanding DCA can help you build a disciplined approach to growing your wealth.

What Is Dollar-Cost Averaging?

According to the Securities and Exchange Commission, dollar-cost averaging means "investing your money in equal portions, at regular intervals, regardless of the ups and downs in the market." This strategy is also known as the "constant dollar plan."

The core principle is straightforward: instead of trying to invest a large sum at the "perfect" moment, you spread your investments across multiple purchases over time. By investing fixed dollar amounts regularly, you automatically buy more shares when prices are low and fewer shares when prices are high.

Consider this simple example: If you invest $500 per month and the share price is $50, you buy 10 shares. If next month the price drops to $25, your $500 buys 20 shares. Over time, this approach typically results in a lower average cost per share compared to buying everything at once at a higher price.

How Dollar-Cost Averaging Works: A Real Example

Let's walk through a detailed example to see DCA in action. According to Schwab's research, here's what happens when you invest $500 over five months:

With dollar-cost averaging, you accumulated 135 shares at an average cost of $3.70 per share ($500 ÷ 135 shares).

If you had invested the entire $500 as a lump sum in January when shares cost $5, you would have purchased only 100 shares. The DCA approach resulted in 35% more shares and a 26% lower average cost per share.

This example illustrates why DCA can be particularly powerful during volatile or declining markets—you're continuously buying at lower prices, which reduces your overall cost basis.

Dollar-Cost Averaging vs. Lump Sum Investing: What the Research Shows

One of the most common questions investors ask is: "Should I invest all my money at once or spread it out over time?" Extensive research from major financial institutions helps answer this question.

The Schwab 20-Year Study

Charles Schwab's research team analyzed 80 rolling 20-year periods dating back to 1926 to compare five different investment approaches. Each hypothetical investor received $2,000 annually to invest. Here's what they found:

Key Insights from the Data

The gap between perfect timing and immediate investing is smaller than you think. The difference between the best possible timing and simply investing immediately was only $15,522 over 20 years—roughly $776 per year. This small gap exists because markets rise approximately 75.6% of the time in any 12-month period, making immediate investment statistically favorable.

Dollar-cost averaging outperforms bad timing and cash. While DCA doesn't beat lump sum investing on average, it significantly outperforms both poor market timing and staying on the sidelines. The monthly DCA investor still accumulated $166,591—far more than the worst timer's $151,343 or the cash holder's meager $47,357.

The real loser is staying in cash. As Schwab's researchers noted, "Investors who procrastinate are likely to miss out on the stock market's potential growth. By perpetually waiting for the 'right time,' [cash holders] sacrificed $103,986 compared to even the worst market timer."

The Benefits of Dollar-Cost Averaging

1. Removes Emotion from Investing

According to FINRA, one of DCA's primary advantages is that it "helps you avoid the emotional investing trap." When you commit to regular, automatic investments, you bypass the fear and greed that lead many investors to buy high (during market euphoria) and sell low (during panics).

2. Eliminates the Need to Time the Market

Market timing is notoriously difficult—even for professional investors. As Fidelity's research notes, "Market timing is exceedingly difficult, even for professional investors." DCA removes this impossible task from your investing strategy.

3. Reduces Average Cost Per Share in Volatile Markets

When markets fluctuate, DCA can result in a lower average cost per share. The examples above demonstrate how investing during price dips naturally leads to purchasing more shares, improving your overall cost basis.

4. Establishes Investing Discipline

Regular contributions create a savings habit that compounds over time. Whether you invest $50 or $500 monthly, the discipline of consistent investing—combined with compound interest—builds wealth more effectively than sporadic large investments.

5. Minimizes Regret

Investing smaller amounts regularly feels less risky than committing a large sum all at once. If you invest $10,000 on Monday and the market drops 10% on Tuesday, you'll likely feel significant regret. With DCA, that same $10,000 spread over several months reduces the emotional impact of short-term volatility.

6. Combats Anchoring Bias

Schwab's researchers highlight that DCA helps combat "anchoring bias"—the tendency to fixate on a single reference price. With multiple entry points over time, you're less likely to obsess over whether you bought at the "right" price.

7. Makes Investing Accessible for Beginners

You don't need a large sum to start investing with DCA. Many brokerages allow investments as small as $1, making this strategy ideal for those just beginning their investing journey.

The Drawbacks of Dollar-Cost Averaging

While DCA offers significant benefits, it's not perfect for every situation. Consider these potential drawbacks:

1. May Forfeit Returns in Rising Markets

When markets trend upward, money waiting to be invested earns lower returns in cash or money market accounts. As FINRA notes, during bull markets, lump sum investing typically outperforms DCA because more of your money is working in the market longer.

2. Lower Expected Long-Term Returns Than Lump Sum

Schwab's 80-period analysis showed that lump sum investing beat DCA in 70 out of 80 historical 20-year periods. If you have a large sum available and a long time horizon, immediate investment has historically been the better mathematical choice.

3. Potential for Higher Transaction Costs

Multiple purchases can incur more brokerage fees, though many modern platforms offer commission-free trading. Before implementing DCA, verify your brokerage's fee structure to ensure transaction costs don't erode your returns.

4. Doesn't Guarantee Profits

DCA won't protect you during sustained bear markets. If an asset consistently declines without recovery, dollar-cost averaging simply means you're buying more of a losing investment. This risk is why diversified index funds are typically better DCA vehicles than individual stocks.

5. Requires Discipline to Execute

The strategy only works if you actually invest the reserved cash. According to FINRA, some investors set aside money for DCA but never follow through, leaving funds uninvested.

Best Investments for Dollar-Cost Averaging

Not all investments are equally suited for dollar-cost averaging. Here's what works best:

Index Funds

Index funds are ideal for DCA because they provide instant diversification across hundreds or thousands of stocks. Rather than betting on individual companies, you're investing in the entire market—reducing the risk of any single stock significantly declining.

According to NerdWallet's analysis, here are top index funds for dollar-cost averaging:

ETFs (Exchange-Traded Funds)

ETFs offer similar diversification to index funds with the flexibility of trading like stocks. Many brokerages now offer fractional ETF shares, meaning you can invest exact dollar amounts regardless of share price. The Invesco NASDAQ 100 ETF (QQQM) is a popular choice for tech-focused investors, with a 0.15% expense ratio.

Retirement Accounts

Your 401(k) and IRA are natural homes for DCA. Contributions are typically automatic, and the tax advantages compound the benefits of regular investing. The 2024 contribution limits are $23,000 for 401(k) employee deferrals ($30,500 if you're 50 or older) and $7,000 for IRAs ($8,000 if 50+), according to the IRS.

What to Avoid with DCA

Individual stocks carry concentrated risk that makes them less suitable for DCA. If you dollar-cost average into a company that ultimately fails, you've simply accumulated more shares of a worthless investment. Stick to diversified funds for your regular DCA contributions.

Common Dollar-Cost Averaging Mistakes to Avoid

Mistake 1: Stopping Contributions During Market Downturns

This is perhaps the most damaging mistake. Market downturns are when DCA provides the most value—you're buying more shares at lower prices. Stopping contributions during a downturn means missing the best buying opportunities and negating the core benefit of the strategy.

Mistake 2: Not Automating Your Investments

Manual investing invites emotional decisions and procrastination. Set up automatic transfers from your bank account to your investment account to remove human error from the equation.

Mistake 3: Using DCA With Individual Stocks Without Research

While DCA works well with diversified funds, applying it to individual stocks requires careful analysis. A company in continuous decline won't recover just because you keep buying—DCA will simply multiply your losses.

Mistake 4: Chasing Hot Stocks Instead of Sticking to the Plan

Schwab's research emphasizes that "if you have an investing plan and stick to it through dollar-cost averaging, you may be more likely to resist temptation" of trending stocks. Abandoning your DCA plan to chase the latest market buzz defeats the strategy's purpose.

Mistake 5: Ignoring Transaction Fees

If your brokerage charges per-trade fees, multiple monthly purchases can add up. Either choose a commission-free platform or invest less frequently to minimize costs.

Mistake 6: Applying DCA When You Have a Lump Sum and Long Time Horizon

If you receive a windfall and won't need the money for 10+ years, the research is clear: lump sum investing has historically outperformed DCA. Use DCA when you're investing from income or want to reduce short-term risk, not simply because you're anxious about market volatility.

Mistake 7: Not Actually Investing the Reserved Cash

Some investors set up a DCA plan, transfer money to a brokerage account, but never actually purchase investments. The cash sits there, earning minimal returns. Ensure your automatic investments actually execute.

Mistake 8: Checking Your Portfolio Too Often

Frequent portfolio checks fuel emotional decisions. If you're using DCA as a long-term strategy, checking quarterly or annually is sufficient. Daily monitoring leads to anxiety and potential strategy abandonment.

How to Start Dollar-Cost Averaging Today

Step 1: Define Your Investment Goal

Determine what you're investing for—retirement, a home down payment, or general wealth building. DCA works best for long-term goals with time horizons of five years or more. Short-term goals may be better served by savings accounts or CDs.

Step 2: Choose Your Investment Account

For retirement savings, maximize tax-advantaged accounts first:

• 401(k): Especially if your employer offers matching contributions
• IRA or Roth IRA: Depending on your income and tax situation

For non-retirement goals, a taxable brokerage account provides flexibility with no contribution limits or withdrawal penalties.

Step 3: Select Your Investments

Choose low-cost, diversified funds that align with your risk tolerance and time horizon. A simple approach is a total market index fund or target-date retirement fund. Read our index funds guide for detailed recommendations.

Step 4: Determine Your Amount and Frequency

Calculate how much you can consistently invest. Common schedules include:

• Weekly: Aligns with weekly paychecks
• Biweekly: Matches typical pay periods
• Monthly: Simple and easy to track

Even $50 to $100 per month builds meaningful wealth over decades.

Step 5: Automate Everything

Set up automatic transfers from your checking account to your investment account on payday. Then configure automatic investments within your brokerage account. This "set it and forget it" approach ensures you actually follow through.

Step 6: Enable Dividend Reinvestment

Enroll in your brokerage's Dividend Reinvestment Plan (DRIP) to automatically purchase additional shares when your funds pay dividends. This compounds your growth without requiring any action.

Step 7: Stay the Course

Don't panic during market downturns—they're opportunities to accumulate shares at lower prices. Review your strategy quarterly or annually to ensure you're on track, but resist the urge to tinker based on short-term market movements.

The Power of $200 Per Month: A 30-Year Projection

To illustrate DCA's long-term potential, consider investing $200 monthly for 30 years. Assuming a 10% average annual return (the S&P 500's historical average):

• Total invested: $72,000 ($200 × 12 months × 30 years)
• Estimated ending value: Approximately $452,000
• Earnings from compound growth: Roughly $380,000

Your consistent $200 monthly investments would grow to more than six times what you contributed, thanks to compound interest working in your favor over three decades.

This projection isn't guaranteed—markets can vary significantly from historical averages—but it illustrates why time in the market matters more than timing the market.

Frequently Asked Questions

Conclusion

Dollar-cost averaging isn't about maximizing returns—it's about maximizing consistency and removing the impossible task of market timing from your investment strategy. While lump sum investing has historically produced slightly better results, DCA offers significant psychological benefits that help investors actually follow through on their plans.

The key insights to remember:

• Consistency beats timing. Even the worst market timer in Schwab's study beat the investor who stayed in cash by over $100,000 across 20 years.
• Automation is essential. Set up automatic contributions to remove emotion and procrastination from the equation.
• Choose diversified investments. Low-cost index funds are ideal vehicles for dollar-cost averaging.
• Stay the course during downturns. Market drops are when DCA provides its greatest advantage—you're buying more shares at lower prices.

The best investment strategy is the one you'll actually stick with. If dollar-cost averaging helps you invest consistently over decades rather than waiting for the "perfect" moment that never comes, it's the right strategy for you.

Ready to start building wealth? Open a brokerage account, choose a low-cost index fund, set up automatic monthly investments, and let time and compound interest do the heavy lifting.