Money guide · Investing basics, fees, and risk
Dollar-cost averaging: how regular investing works
Understand regular fixed-dollar investing with a share-price example and distinguish it from investing an existing lump sum.
How it works
Recurring contributions from paychecks can support a consistent saving habit. Gradually investing cash you already hold is a separate timing decision because some money stays uninvested longer. Compare these situations distinctly. Market direction, cash returns, transaction costs, and personal circumstances affect the outcome.
A worked example
Invest $100 when a share costs $10, then another $100 when it costs $5. You buy 10 and 20 shares, respectively: 30 shares for $200, or about $6.67 average cost. The simple average of the two prices is $7.50, but that ignores unequal share counts. If the shares later cost $4, the holding is still worth only $120.
What to compare
Choose a contribution amount that fits the budget, an appropriate investment, and a schedule with manageable fees. Review the total portfolio and reserve for upcoming expenses. Automatic purchases do not replace checking account terms or investment risk. When comparing a lump sum with staged purchases, use the same available cash and clearly stated dates.
A common mistake to avoid
A lower average purchase price in one example does not establish superior returns in every market. If prices rise throughout the staging period, earlier investment could outperform later purchases. Do not advertise regular contributions as protection from loss or a guarantee of profit. The strategy governs purchase timing, not the quality of the investment.
Does dollar-cost averaging guarantee a profit?
No. The purchased investment can decline, and a regular schedule does not remove market risk or ensure it outperforms investing sooner.
Sources and further reading
Connect this to inflation
Inflation changes the spending power of money over time. Read the related inflation explainer, or explore historical market returns using your own assumptions.