How Dollar-Cost Averaging (DCA) Helps

If you’ve ever worried about investing your money at the “wrong” time, you’re not alone. Markets go up, markets go down - and trying to perfectly time them is nearly impossible. That’s where Dollar-Cost Averaging (DCA) comes in. Instead of investing a lump sum all at once, you spread it out over time.

An Example

Let’s say you invest $100 every month into Apple Inc stock for five months. During that time, the stock price changes:

  
      Month
      Price
      Amount Invested
      Shares Bought
    
      1
      $100
      $100
      1.00
    
      2
      $80
      $100
      1.25
    
      3
      $125
      $100
      0.80
    
      4
      $90
      $100
      1.11
    
      5
      $105
      $100
      0.95
    
      Total
      $500
      5.11

Month	Price	Amount Invested	Shares Bought
1	$100	$100	1.00
2	$80	$100	1.25
3	$125	$100	0.80
4	$90	$100	1.11
5	$105	$100	0.95
Total	$500	5.11

Because you invest the same $100 each month:

You buy more shares when the price is low
You buy fewer shares when the price is high

After five months, you’ve invested $500 total. Because you bought more shares during the dips, your average cost per share ($97.80) ends up lower than the average stock price over that period ($100). The portfolio is now worth $536.55 (5.11 x $105).

Want to learn about the best scenarios to utilize DCA as an investment strategy? Go here.