Dollar-Cost Averaging (DCA)

What is Dollar-Cost Averaging (DCA)? — Definition

Dollar-cost averaging (DCA) is the practice of investing a fixed dollar amount on a regular schedule — weekly, monthly, or quarterly — regardless of whether the market is up or down. When prices are high, your fixed amount buys fewer shares. When prices are low, it buys more. Over time, this averages out your cost basis and removes the temptation to time the market.

DCA is particularly powerful during volatile markets or bear markets. While it can underperform lump-sum investing during prolonged bull markets (because lump sum gets more time in the market), it significantly reduces the psychological burden and the risk of investing a large sum at a market peak.

Example

An investor puts $500 per month into an S&P 500 index fund. In January the price is $400/share (they buy 1.25 shares). In February it drops to $320 (they buy 1.5625 shares). In March it recovers to $380 (they buy 1.316 shares). Their average cost: about $364 — lower than both the January and March prices.

DCA pairs well with BMInsider's Portfolio Tracker, which lets you log each purchase and automatically calculates your average cost basis across all your positions.