What is Dollar-Cost Averaging (DCA)?

Dollar-cost averaging is an investment strategy where you invest a fixed amount of money into a particular investment at regular intervals, regardless of the share price. For example, you might decide to invest $100 into an S&P 500 ETF on the 1st of every month.

How Does DCA Work?

By investing a fixed amount regularly, you automatically buy more shares when the price is low and fewer shares when the price is high. Over time, this can result in a lower average cost per share compared to trying to 'time the market' by investing a lump sum all at once.

Key Benefits of DCA:

• Removes Emotion: It's an automated, disciplined approach that prevents you from making fear-based or greed-based decisions.
• Reduces Risk: It mitigates the risk of investing a large amount of money right before a market downturn.
• Accessible: It allows investors to start with small, regular contributions rather than needing a large initial sum.

DCA in Action

• Month 1: You invest $100. The stock price is $10. You buy 10 shares.
• Month 2: You invest $100. The stock price drops to $5. You buy 20 shares.
• Month 3: You invest $100. The stock price rises to $12.50. You buy 8 shares.

After 3 months, you've invested $300 and own 38 shares. Your average cost per share is $7.89 ($300 / 38 shares), even though the average price over the period was $9.17.