Dollar-Cost Averaging (DCA)
Investing a fixed amount on a fixed schedule, whatever the price happens to be.
Fixing the dollar amount rather than the share count produces a small mechanical effect: the same $500 buys fewer shares when prices are high and more when they are low, so the average cost per share comes in below the average price over the period.
On the question of whether to spread a lump sum out, Vanguard's work found immediate investment ahead of gradual entry roughly two thirds of the time, which follows from markets rising more often than falling. The case for spreading it is about the distribution of regret rather than the average outcome.
Most people already do this without naming it. A 401(k) contribution deducted each pay period is dollar-cost averaging, running automatically, at whatever the market opened at that fortnight.
Worked through
$500 a month across a volatile stretch
A fixed $500 monthly contribution, buying whatever the price allows that month.
- January at $238
- 2.1 shares
- March at $179
- 2.8 shares
- June at $250
- 2.0 shares
- Average cost
- $218
Average price across the three months was $222. Average cost paid was $218, because more shares were bought at the lower price.
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