“Wonder if this is a good time to invest in stocks?” “Boy, I sure wish I had bought that stock six months ago.” “Trying to guess which direction the market is going sure is frustrating.”
Sound familiar? If you’ve ever agonized over when you should invest, you’ve come to realize it’s never a good idea to try to time the markets. Another strategy? Dollar cost averaging.
Consistency trumps timing
It sounds technical, but dollar cost averaging is quite simple: you invest a consistent amount, week after week, month after month (think payroll contributions going into your 401(k) account) regardless of whether the markets are up, down or sideways. When your investment prices are lower, your fixed dollar amount buys more shares. When prices are up, your dollars buy fewer shares. Over time, your average share price may be lower than if you had invested a large sum all at once.
Autopilot investing at work
Let’s assume you invest $100 a month into a mutual fund. The fund’s share price is different each month so the number of shares you buy also goes up and down each month.
| Month | Investment $ | Share price | Shares purchased |
| 1 | $100 | $12 | 8 |
| 2 | $100 | $10 | 10 |
| 3 | $100 | $14 | 7 |
| 4 | $100 | $10 | 10 |
| 5 | $100 | $8 | 13 |
| 6 | $100 | $8 | 13 |
At the end of six months, you’ve invested $600 and you own 61 shares1. Even though the average cost per share over that six months was $10.33, your average cost per share, thanks to dollar-cost averaging2, is $9.83.
If you had invested your entire $600 in month one, you would have spent $12 per share and purchased only 50 shares.. Of course, if you were lucky enough to invest your $600 in month five when the price was down, you’d own 75 shares at an average cost of $8. But no one can accurately pick that low point with every investment they own. Even the experts don’t have a crystal ball. That’s why dollar cost averaging makes sense for so many investors.
Take your emotions out of the game
Dollar cost averaging builds in the discipline to save the same amount on a regular schedule and takes the emotion out of investing. You don’t have to worry about what your investments are doing at any given time and whether you should invest more or less. You invest the same dollar amount each month and let the law of averages work to your advantage. No timing necessary.
1 Shares purchased have been rounded to the next whole share.
2 Dollar cost averaging cannot guarantee a profit or prevent losses in declining and volatile markets.
FAQs
You don't have to worry about what your investments are doing at any given time and whether you should invest more or less. You invest the same dollar amount each month and let the law of averages work to your advantage. No timing necessary. Shares purchased have been rounded to the next whole share.
What is the best interval for dollar-cost averaging? ›
Dollar-cost averaging is the practice of putting a fixed amount of money into an investment on a regular basis, typically monthly or even bi-weekly. If you have a 401(k) retirement account, you're already practicing dollar-cost averaging, by adding to your investments with each paycheck.
When should you use dollar-cost averaging? ›
In a market with major price swings, dollar-cost averaging can be particularly useful, in part because it allows you to ignore the emotional highs and lows of watching the market and trying to time your trades perfectly. When prices are down, your set investment buys more shares; when they are up, you get fewer shares.
Is it better to invest all at once or monthly? ›
A 2021 Northwestern Mutual Life study showed that investing a lump sum generally outperforms dollar-cost averaging over various periods of time. Just keep in mind that this is based on past historical performance, so it doesn't necessarily mean this will remain the case in the future.
What day of the week is best to DCA? ›
The Best Day to Weekly DCA Bitcoin
Since 2010, Mondays have had the highest odds of having the weekly low price relative to the weekly high price falling on this day. This pattern holds up over the last 12 months.
Is it better to DCA daily or monthly? ›
Investment goals: Your time horizon is crucial. If you're aiming for long-term growth, a monthly DCA might suit you, allowing you to ride out short-term market fluctuations. In contrast, if you're after short-term profits, a weekly or bi-weekly DCA can help you take advantage of quicker market movements.
What is the best dollar-cost averaging strategy? ›
The strategy couldn't be simpler. Invest the same amount of money in the same stock or mutual fund at regular intervals, say monthly. Ignore the fluctuations in the price of your investment. Whether it's up or down, you're putting the same amount of money into it.
Why i don t recommend dollar-cost averaging? ›
Dollar cost averaging is an investment strategy that can help mitigate the impact of short-term volatility and take the emotion out of investing. However, it could cause you to miss out on certain opportunities, and it could also result in fewer shares purchased over time.
What are some downsides of dollar-cost averaging? ›
The longer the period examined, the more likely that appreciation will occur. This means that if you are averaging into a position over a long time, you may not do as well as if you had simply invested a lump sum at the beginning of the period considered.
Is dollar-cost averaging better than timing the market? ›
Dollar cost averaging is often considered more suitable for novice investors, as it requires less knowledge and experience to implement. Market timing, however, may be more appropriate for experienced investors who have a deeper understanding of market trends and the ability to analyze and interpret market data.
The lump-sum strategy came out on top in each time period. This is because markets generally rise over time. So the DCA investor often bought in at higher average prices. While this data is helpful, many of us do not make decisions based solely on stats and figures.
What is the smartest thing to do with a lump sum of money? ›
Start paying off the debt with the highest interest rates and work your way down to the debt with the lower rates. If you cannot pay all your high-interest debt with your windfall, pay as much as possible and focus your attention on other high-interest debt.
Should I invest at all time highs? ›
The S&P 500 has reached thousands of new all-time highs since 1950, according to data from RBC Global Asset Management. Consistently investing, even at market highs, has proven to be the best approach.
What is the 3-5-7 rule in trading? ›
A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What is the 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
What is the statistically best day to invest? ›
Mondays: A Day of Adjustment
Historically, Mondays have often been considered a good day to buy stocks, primarily due to the 'Weekend Effect' or 'Monday Effect'. This theory suggests that stock prices tend to drop on Mondays due to negative news released over the weekend.
What is the daily DCA strategy? ›
DCA is an investment technique that involves allocating a fixed amount into an asset (in this case, Bitcoin) at regular time intervals, regardless of the asset's price fluctuations in the market. For someone to adopt a DCA strategy, it's crucial that they do not dwell on price movements or try to anticipate them.
What is the dollar-cost averaging cadence? ›
The idea behind dollar-cost averaging is simple: you choose a set amount of money to invest at regular intervals over time, such as monthly, bi-weekly, weekly, or even daily.
What is dollar-cost averaging with timing? ›
Investing set amounts at regular intervals over time—also known as dollar cost averaging—can help you manage timing risk and stick to your long-term plan.
