What is Dollar-cost averaging?

Dollar-cost averaging means investing the same amount of money at regular intervals, for example $500 on the first day of every month, whatever prices are doing. Because the amount is fixed, it buys more shares (small units of ownership in a company or fund) when prices are low and fewer when they are high. A workplace pension or a standing monthly transfer into an index fund, a fund that tracks a market index such as the S&P 500, works this way.

Say you invest $1,000 a month for four months in a hypothetical fund. Its price is $50 in month one, $40 in month two, $25 in month three and back to $50 in month four. The purchases are $1,000 ÷ $50 = 20 shares, $1,000 ÷ $40 = 25 shares, $1,000 ÷ $25 = 40 shares and $1,000 ÷ $50 = 20 shares, giving 105 shares for $4,000. The average cost per share is $4,000 ÷ 105, about $38.10, below the average price of $41.25 across the four months. With the price back at $50, the holding is worth 105 × $50 = $5,250, a gain of $1,250 even though the price only returned to where it started.

The common misunderstanding is that dollar-cost averaging raises returns in general. It lowers the average cost relative to the average price, which is not the same as earning more. When someone already holds a large sum (a lump sum), spreading it out leaves part of it in cash, and if prices rise in the meantime, the later purchases happen at higher prices. Rising years have been more common than falling ones: 25 of the 32 calendar years 1994–2025 were positive for the S&P 500. Investing a lump sum at once has therefore often ended ahead, while dollar-cost averaging mainly reduces the risk, and the regret, of putting everything in just before a sharp fall. It does not prevent losses if prices keep declining.

For a private investor building a long-term portfolio, the main value is behavioural. Most people earn money month by month, so regular investing matches how savings actually arrive. A fixed routine removes the decision of when to buy, which helps people keep investing through volatility, meaning the ups and downs of prices, and through sell-offs, when buying feels hardest. Over decades, that consistency, combined with compounding, the growth of returns on earlier returns, usually matters more than the exact day each payment is made.

By Dr. Harry Hamann

Is dollar-cost averaging better than investing a lump sum?
Not in terms of expected return. Because markets have risen in more years than they have fallen, investing a lump sum at once has often ended ahead. Dollar-cost averaging spreads the entry over time, which reduces the risk and regret of investing everything just before a sharp fall.

Does dollar-cost averaging reduce risk?
It reduces timing risk, the chance of buying everything at a high point. It does not reduce the risk of the investment itself: if prices fall and stay low, a portfolio built through regular purchases still loses value.

How often do investors use dollar-cost averaging?
Most people invest monthly, matching when salaries are paid. Weekly or quarterly schedules also exist. The interval matters less than sticking to it, though very frequent small purchases can add up in trading costs where brokers charge per trade.

Why is my average cost lower than the average price?
A fixed amount buys more shares at low prices and fewer at high prices. The cheaper purchases therefore carry more weight, which pulls the average cost per share below the plain average of the prices paid.