Dollar-Cost Averaging

Dollar-cost averaging is the practice of investing a fixed amount of money at regular intervals — monthly, say — regardless of what the price is doing, so that the same dollar amount buys more shares when prices are down and fewer shares when prices are up.

Invest $500 every month into the same fund, and in a month when the price is unusually low, that $500 buys more shares than usual. In a month when the price has run up, it buys fewer. Over time the price you've effectively paid per share is an average across all those purchases, rather than a single bet placed at a single moment.

What it actually solves

Dollar-cost averaging is often framed as a way to improve returns, but its real value is behavioral, not mathematical. Because it removes the decision of when to invest, it removes the temptation to wait for a "better" entry point that may never arrive, or to freeze entirely out of fear of buying at the wrong time. For money you're investing gradually as you earn it — most retirement contributions, for example — this isn't even a choice, it's just how the cash flow works.

A common misunderstanding

Dollar-cost averaging is sometimes described as outperforming a lump-sum investment made all at once, but that's not generally true. Markets rise more often than they fall over long periods, so a lump sum invested immediately tends to be in the market longer and, on average, ends up ahead of money drip-fed in gradually. Dollar-cost averaging isn't a superior return strategy; it's a way to reduce regret and behavioral risk when a large sum feels too uncomfortable to invest all at once.