“Wonder if this is a good time to invest in stocks?” “Boy, I sure wish I had bought that stock six months ago.” “Trying to guess which direction the market is going sure is frustrating.”
Sound familiar? If you’ve ever agonized over when you should invest, you’ve come to realize it’s never a good idea to try to time the markets. Another strategy? Dollar cost averaging.
Consistency trumps timing
It sounds technical, but dollar cost averaging is quite simple: you invest a consistent amount, week after week, month after month (think payroll contributions going into your 401(k) account) regardless of whether the markets are up, down or sideways. When your investment prices are lower, your fixed dollar amount buys more shares. When prices are up, your dollars buy fewer shares. Over time, your average share price may be lower than if you had invested a large sum all at once.
Let’s assume you invest $100 a month into a mutual fund. The fund’s share price is different each month so the number of shares you buy also goes up and down each month.
| Month | Investment $ | Share price | Shares purchased |
| 1 | $100 | $12 | 8 |
| 2 | $100 | $10 | 10 |
| 3 | $100 | $14 | 7 |
| 4 | $100 | $10 | 10 |
| 5 | $100 | $8 | 13 |
| 6 | $100 | $8 | 13 |
At the end of six months, you’ve invested $600 and you own 61 shares1. Even though the average cost per share over that six months was $10.33, your average cost per share, thanks to dollar-cost averaging2, is $9.83.
If you had invested your entire $600 in month one, you would have spent $12 per share and purchased only 50 shares.. Of course, if you were lucky enough to invest your $600 in month five when the price was down, you’d own 75 shares at an average cost of $8. But no one can accurately pick that low point with every investment they own. Even the experts don’t have a crystal ball. That’s why dollar cost averaging makes sense for so many investors.
Take your emotions out of the game
Dollar cost averaging builds in the discipline to save the same amount on a regular schedule and takes the emotion out of investing. You don’t have to worry about what your investments are doing at any given time and whether you should invest more or less. You invest the same dollar amount each month and let the law of averages work to your advantage. No timing necessary.
1 Shares purchased have been rounded to the next whole share.
2 Dollar cost averaging cannot guarantee a profit or prevent losses in declining and volatile markets.
FAQs
You don't have to worry about what your investments are doing at any given time and whether you should invest more or less. You invest the same dollar amount each month and let the law of averages work to your advantage. No timing necessary. Shares purchased have been rounded to the next whole share.
What is the best time interval for dollar-cost averaging? ›
When choosing dollar cost averaging (DCA), an investor allocates a set amount of money at regular intervals, usually monthly or quarterly. DCA is generally used for more volatile investments such as stocks or mutual funds, rather than bonds or CDs.
Should I invest all at once or over time? ›
As a new investor, you can either invest your money all at once as a lump sum or invest it over time, which is called dollar-cost averaging. Research by Vanguard has found that lump-sum investing outperforms dollar-cost averaging 68% of the time.
What day of the week is best to DCA? ›
The Best Day to Weekly DCA Bitcoin
Since 2010, Mondays have had the highest odds of having the weekly low price relative to the weekly high price falling on this day. This pattern holds up over the last 12 months.
Is dollar-cost averaging the best way to invest? ›
Dollar cost averaging is the practice of investing a fixed dollar amount on a regular basis, regardless of the share price. It's a good way to develop a disciplined investing habit, be more efficient in how you invest and potentially lower your stress level—as well as your costs.
What is the best frequency to dollar cost average? ›
Most investors prefer the monthly dollar cost averaging method. This is a more familiar frequency to those used to a SIPP plan where funds are taken directly from your salary and invested into your investment account.
Is it better to DCA daily or monthly? ›
Investment goals: Your time horizon is crucial. If you're aiming for long-term growth, a monthly DCA might suit you, allowing you to ride out short-term market fluctuations. In contrast, if you're after short-term profits, a weekly or bi-weekly DCA can help you take advantage of quicker market movements.
What is the 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
What is the statistically best day to invest? ›
Historically, Mondays have often been considered a good day to buy stocks, primarily due to the 'Weekend Effect' or 'Monday Effect'. This theory suggests that stock prices tend to drop on Mondays due to negative news released over the weekend.
Is it better to buy stocks on Monday or Friday? ›
Monday is probably the best day to trade stocks, since there is likely considerable volatility pent up over the weekend. That said, Friday can also be a good day to trade, as investors make moves to prepare their portfolios for a couple of days off.
A disadvantage of dollar-cost averaging includes missing out on higher returns over the long term.
Is dollar-cost averaging better than timing the market? ›
Dollar cost averaging is often considered more suitable for novice investors, as it requires less knowledge and experience to implement. Market timing, however, may be more appropriate for experienced investors who have a deeper understanding of market trends and the ability to analyze and interpret market data.
What is smart dollar-cost averaging? ›
Dollar cost averaging is a powerful investment strategy that provides a systematic and disciplined approach to building wealth over time. By consistently investing fixed amounts at regular intervals, investors can navigate market volatility, mitigate risks, and achieve long-term financial goals.
What is the time frame for DCA? ›
Standard DCA: This model spreads your investments over a moderate timeframe (e.g., 6 months), balancing between avoiding market peaks and getting fully invested. Fast DCA: Ideal for those who want to invest quickly, this model compresses the investment period (e.g., 3 months).
Is it better to invest every week or every month? ›
A year has 52 weeks and only 12 months. So if you invest monthly, you invest $12k a year. If you invest weekly, you invest $13k a year. Here the weekly approach wins clearly with a 7.89% advantage.
What is dollar-cost averaging Dave Ramsey? ›
It's best practice to invest using a dollar-cost averaging strategy where you continuously buy shares of a company over time, regardless of the price per share. Dollar-cost averaging usually results in better returns over the long term versus timing the market.
