What Is Dollar Cost Averaging?

Dollar cost averaging is the strategy of investing a fixed dollar amount on a regular basis—regardless of the investment’s share price or what’s happening in the markets. It’s a disciplined approach that can help reduce the average cost per share over time.

How It Works

When prices are low, your fixed contribution buys more shares. When prices are high, you purchase fewer shares. Over time, this strategy can help lower the average cost of your investments by buying at a mix of prices rather than a single price point.

An Investing Example

John invests $100 three times over a period, regardless of market price. Instead of buying all at once, he spreads out his investments. Because prices fluctuate, he ends up purchasing more shares when the price is low and fewer when it’s high. In total, he buys 7.8 shares at an average price of $38.46, rather than 6 shares at $50 if he had invested a lump sum. That small difference can grow significantly over time through compounding.

Reducing Volatility

In addition to potentially lowering the average cost per share, dollar cost averaging helps reduce investment volatility. Rather than risking a large purchase during a market high, you’re gradually investing smaller amounts that smooth out the impact of market ups and downs.

You’re Probably Already Doing It

If you’re contributing to a workplace retirement plan, like a 401(k) or 403(b), you’re already using dollar cost averaging. With every paycheck, a set amount is deducted and invested into your chosen funds—regardless of market conditions. This automatic process helps you invest consistently and reduce emotional, reactive decisions during market swings.

Stay Consistent for Long-Term Growth

The key to dollar cost averaging is consistency. No matter what the market is doing, continuing to make regular contributions to your retirement plan gives this strategy time to work. Over the long term, it can help lower your average investment cost and build a more stable path toward retirement.

Final Thoughts

So, no matter what’s happening in the market—stay disciplined, stay invested, and let dollar cost averaging work for you. It’s a simple, steady strategy that can make a big difference in your financial future.