More Images / Shutterstock.com
Commitment to our readers
The GOBankingRates editorial team is committed to providing you with unbiased reviews and information. We use data-driven methods to evaluate financial products and services – our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our review methodology for products and services.
20 years
Helping you become richer
trusted by
millions of readers
Dollar-cost averaging is an investing strategy where you invest the same amount of money over a regular period of time, no matter what the market is doing. The idea is simple: You buy more shares when prices are low and fewer shares when prices are high, helping to reduce the risk of investing all your money at once at the wrong time.
This can be a smart strategy for beginners, people with stable income, and investors who want to avoid emotional market timing. But it does not guarantee profits, and it may dilute the lump sum investment when the market moves upward over time.
What is dollar-cost averaging?
Dollar-cost averaging means investing the same amount of money at regular intervals regardless of whether prices go up or down. By investing the same dollar amount each time, you buy more of an investment when it’s worth less and less when it’s worth more.
Dollar-cost averaging is actually a stability strategy, not a guarantee of returns. This helps you stick to a plan instead of trying to guess the best time to invest.
tip: Dollar-cost averaging works best when automated. Even if you have to decide every month whether to invest or not, emotions can still come back.
How does dollar-cost averaging work?
Dollar-cost averaging works by spreading your purchases over time. You choose:
- a fixed dollar amount
- a schedule, such as weekly, biweekly, or monthly
- Investments you want to continue buying
When prices fall, your fixed amount buys more shares. It buys fewer shares when prices rise. This may result in a lower average price per share over time and help investors avoid the temptation to time the market.
What does dollar-cost averaging look like in real life?
Here is a simple example. Suppose you invest $50 per month In the same fund for one year.
month investment funds share price shares purchased January $50 $7.00 7.14 february $50 $9.00 5.56 march $50 $12.00 4.17 april $50 $10.00 5.00 May $50 $8.00 6.25 june $50 $11.00 4.55 july $50 $13.00 3.85 august $50 $7.00 7.14 September $50 $9.00 5.56 october $50 $10.00 5.00 november $50 $12.00 4.17 December $50 $8.00 6.25 You invest throughout the year $600 submit total 64.64 shares.
This example clearly shows the basic idea: The dollar amount remains the same, but the number of shares varies with the price. This is what allows the strategy to average out your purchase costs over time.
What are the advantages of dollar-cost averaging?
Dollar-cost averaging can be useful because it simplifies investing and helps reduce emotional decision making.
main benefits
- Helps reduce time-related risks: You don’t have to guess the right entry point.
- Encourages continuity: This turns investing into a routine.
- Your average share cost may decrease over time: You buy more shares when prices are low.
- Controlling emotions can help: Helps investors avoid the temptation to time the market.
Key Insights: Dollar-cost averaging is often more about behavior than mathematics. Its biggest advantage is to help investors remain disciplined.
What are the drawbacks of dollar-cost averaging?
Dollar-cost averaging is not always the highest-return strategy.
Main shortcomings
- It may underperform lump sum investments: This may reduce long-term returns, especially in a rising market.
- It does not guarantee profits: It does not protect against losses when prices are falling.
- Benefits you may miss out on while you wait: If you are investing cash slowly as the market rises, that cash has not yet fully unfolded.
- Fees may matter: Frequent purchases may lead to higher brokerage charges, which may reduce returns.
Dollar-Cost Averaging vs. Lump Sum Investing: Which is Better?
Lump sum investment generally wins on return potential because your money hits the market sooner. Lump sum investments give investors earlier exposure to the market, and research shows that investing the lump sum immediately has often historically been the wise move.
Dollar-cost averaging may still be better if you:
- Investing a large amount at once feels nervous
- Want to reduce the risk of short-term regrets
- Prefer a more gradual approach
- They are investing from ongoing paychecks rather than a big lump sum
quick comparison
| strategy | best for | main upside | Main downside |
|---|---|---|---|
| dollar-cost averaging | Continued investment, nervous investors | reduces time pressure | May lag behind rising markets |
| lump sum investment | Investors with cash are now ready | more time in the market | more short-term time risk |
When does dollar-cost averaging make sense?
Dollar-cost averaging generally makes most sense when you’re investing while you’re making money, not when you’re holding a big pile of cash and deciding whether to delay investing it. This concern doesn’t apply in the same way to something like a 401(k), because you’re investing the money as it comes in.
It may be suitable for:
- new investors
- People contribute to 401(k) every paycheck
- investors in volatile markets
- Those who want a set it and forget system
- Investors who struggle with market timing
How do you get started using dollar-cost averaging?
Getting started is quite simple.
Step 1: Choose your investment
This could be a 401(k), IRA, brokerage account, mutual fund or ETF.
Step 2: Choose a schedule
Choose how often you will invest, such as weekly, fortnightly or monthly.
Step 3: Set a Fixed Amount
Decide how much you can invest consistently without breaking your budget.
Step 4: Automate it
Automated investing is usually the easiest way to stay consistent.
Step 5: Review, Don’t Obsess
Check in on your long-term progress occasionally, but avoid reacting to every short-term step.
tip: A dollar-cost averaging plan works best when the amounts are realistic. Small contributions you can continue to make are better than ambitious contributions that you’ll stop after two months.
final take to go
Dollar-cost averaging means investing the same amount of money over a regular period of time, regardless of market conditions. This can help reduce time pressure, smooth out the emotional side of investing and make it easier to remain consistent over time.
However, this is not a magical strategy. It does not guarantee profits, and a lump sum investment often gives better long-term results because more money reaches the market sooner. Still, for many investors, dollar-cost averaging is a practical way to continue investing without trying to beat the market.
Frequently Asked Questions About Dollar-Cost Averaging
Figuring out dollar-cost averaging can be confusing, especially if you’re trying to compare it to a lump sum investment or decide whether it fits your own investing style. With that in mind, here are some common questions and concerns that may come up when looking into this:- What is dollar-cost averaging in simple words?
- Dollar-cost averaging means investing the same amount of money over a regular period of time, regardless of whether prices go up or down. The goal is to gradually build your positions rather than trying to time the market perfectly.
- Is dollar-cost averaging a good strategy?
- It can be possible. Dollar-cost averaging can be a good strategy for people who want to invest consistently, make less emotional decisions, and avoid investing large amounts of money in the market at once. However, this may be less effective than a lump sum investment in a rising market.
- Does dollar-cost averaging reduce risk?
- This may reduce timing risk, but it does not eliminate investment risk. Your investments can still lose value, especially in a prolonged recession, and dollar-cost averaging does not guarantee a profit.
- Is dollar-cost averaging better than lump sum investing?
- Not always. Lump sum investing often yields better long-term results because more money is invested sooner, but dollar-cost averaging may feel more comfortable for investors who want to spread their entry points.
- Can you use dollar-cost averaging in a 401(k)?
- Yes. In fact, many people already do. Regular paycheck contributions to a 401(k) are one of the most common real-world examples of dollar-cost averaging.
Information is accurate as of April 9, 2026.
Our in-house research team and on-site financial experts work together to create accurate, unbiased and up-to-date content. We fact-check every statistic, quote and fact using reliable primary resources to ensure that the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our Editorial Policy.