Dollar Cost Averaging – Pros and Cons of Systematic Investing

Dollar cost averaging is periodically investing the same amount of money. It's a great way to invest, but there are pros and cons.
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Dollar Cost Averaging is the easiest way to systematically invest in the stock market. Through Dollar Cost Averaging or DCA, you can buy more shares when stock prices are low and fewer when prices are high. It’s the easiest way to automate your investing.

If you’ve been following the financial markets recently, you know that things have been turbulent. For many people, all this volatility is scary. After all, how do you know when to put your money in the market — and when to pull it back out?

The good news is that you don’t have to know when to put money in and pull it out if you consider using an investing strategy called dollar cost averaging. It’s a strategy that works for long-term wealth building using the stock market.

What is Dollar Cost Averaging?

Dollar-cost averaging is a common investment strategy where you invest the same amount at set intervals. This takes the guesswork out of market timing, and you don’t need to worry about trying to “time the market.”

Because the amount you invest remains constant, you can buy more shares when the price is low and fewer shares at a higher price. The goal is to buy more shares at a lower average cost per share over time.

This sounds like a great way to invest, and it can be. But there are times when there are better ways of investing than dollar cost averaging.

For example, many experts believe lump sum investing can result in better returns than investing a little over time. The idea behind lump sum investing is that the longer you have your money in the market, the more money you will make. Lump sum investing works best if you have a lot of money to invest at once.

Lump sum investing vs. dollar cost averaging. Here is an online tool that calculates actual returns using dollar cost averaging vs. investing in a lump sum. If you play with the tool for a few minutes, you will find examples where lump sum investing wins out, and examples when dollar cost averaging brings better returns.

Even though lump sum investing can result in better returns over the long run, let’s look at an example of dollar cost averaging and why it makes sense to invest that way.

Dollar Cost Averaging Example

Let’s use dollar cost averaging to max out a Roth IRA. The max you can invest in a Roth IRA in 2022 is $6,000.

Many people don’t have $6,000 to put down at once. However, they may be able to break it down into monthly payments.

Here is how dollar cost averaging would look if you broke down an IRA investment over 12 months (The numbers represent a fictional fund):

Investment date Amount invested Price per share # Shares purchased
January $500.00 $33.21 15.05
February $500.00 $35.70 14.01
March $500.00 $34.83 14.36
April $500.00 $32.10 15.58
May $500.00 $33.71 14.83
June $500.00 $35.08 14.25
July $500.00 $29.04 17.21
August $500.00 $28.17 17.75
September $500.00 $27.92 17.91
October $500.00 $25.83 19.36
November $500.00 $26.42 18.93
December $500.00 $28.18 17.74
Total $6,000.00 $30.85 avg. 196.98 shares owned

In this example, you can see that as the price per share goes up, you can buy fewer shares, and as the price per share goes down, you buy more shares. Note that the average share price is $30.85, less than the share price in January.

In this example, dollar cost averaging comes ahead of investing in a lump sum, but it could come out with the opposite result.

Pros and Cons of Systematic Investing with Dollar Cost Averaging

The idea behind dollar cost averaging is that, eventually, it all evens out in terms of the overall cost. Sometimes you will pay less for your shares, and sometimes more, depending on the market. The important thing with dollar cost averaging is investing consistently.

Let’s look at some advantages and disadvantages of investing through dollar cost averaging.

Pros of Dollar Cost Averaging

Affordability. Dollar cost averaging is more affordable and allows people to treat investing like paying a bill. It is difficult for most people to invest a $6,000 lump sum to max out a Roth IRA or Traditional IRA. However, many people may be able to afford a monthly installment of $500.00, which will put them on pace to max out their IRA for the year.

A similar example is investing in the Thrift Savings Plan, which is deducted directly from your paycheck. Even if you could afford to invest the $20,500 limit from your cash savings at the beginning of the year, your paycheck probably wouldn’t be large enough to cover that. Most people also rely upon their paychecks to pay bills throughout the month. A TSP or other employer-sponsored retirement plan forces the participant to use dollar cost averaging.

Convenience. It is easy to set up dollar cost averaging as a monthly payment and incorporate it into your budget.

Cons of Dollar Cost Averaging

Lump sum investing can result in better returns. Lump sum investing can often result in better returns because you have your money in the market longer. This is based on the idea that the longer you have your money in the market, the better your returns are over the long run.

More fees. Dollar cost averaging also means making more transactions, which can result in higher brokerage fees. You won’t pay transaction fees if you invest in the TSP or an index fund that doesn’t charge commissions.

But you may have to pay fees if you make monthly stock or mutual fund purchases. You can mitigate these fees by investing quarterly or semi-annually. This is still a form of dollar cost averaging on a different timescale.

Dollar Cost Averaging vs. Value Averaging

Dollar cost averaging is not a perfect method of investing, but it has its benefits – it is easy to set up and takes very little upkeep. While most people are familiar with dollar cost averaging, there is a similar investment strategy called dollar value averaging, or simply value averaging.

Here is a comparison of the two investment methods:

Dollar Cost Averaging

Dollar cost averaging is investing the same amount at set intervals, regardless of the share price. A good example would be bi-monthly contributions to a retirement plan such as a TSP or IRA. With dollar cost averaging, a steady contribution will buy more shares when prices are low, and fewer shares when prices are high. This takes the guesswork out of systematic investing and smoothes the average purchase price for your shares.

Value Averaging

A similar investing technique is value averaging, which involves changing your periodic investment contributions. With value averaging, you start with the end goal in mind and work toward a target number.

Let’s say you have a target portfolio value of $12,000 by year-end, which means you need to grow your portfolio by $1,000 per month. You contribute $1,000 the first month, then make subsequent contributions based on the total portfolio amount.

If in the second month the value of your shares drops to $900, you would contribute $1,100 to bring the portfolio’s total value to $2,000. If the value of the shares rose to $1,100, you would only need to contribute $900 to bring the portfolio’s value to $2,000.

How is Value Averaging Different from Dollar Cost Averaging?

With DCA, you always contribute the same amount of money, so you buy more shares when prices are low only because the shares cost less. With VA, you buy more shares because the prices are lower, and you contribute more money. Conversely, with VA, you buy fewer shares when prices are higher because share prices are higher and you contribute less money.  In effect, it gives you more bang for your buck.

Pros and Cons of Value Averaging

The main benefit of value averaging is that it forces investors to contribute less money when prices are high and contribute more money when prices are low, as opposed to dollar cost averaging, which uses the same contribution regardless of the share price.

Value averaging can have better results in the long run because you contribute more money when shares are lower. To employ correctly, value averaging also requires investors to know where they stand regarding reaching their investment goal, which is another added benefit.

There are several disadvantages of value averaging. Value averaging takes more time than DCA, which runs on auto-pilot once you start it. Another disadvantage is when share prices fall so much, it takes large investments to bring many portfolios back up to the goal. The 2008 economic crisis is a good example of this. The 2008-2009 recession decimated stock prices. Trying to make additional contributions when many people are hurting for cash flow is not always possible.

Another disadvantage is withholding contributions because you have already met your goal for the year. The bull market that followed the Great Recession was unprecedented and led to multiple record-high stock markets. If an investor decided they had met their goals and could slow down contributions, they might have missed out on substantial gains in their portfolio.

More information about value averaging. Former Harvard professor Michael E. Edleson developed Dollar Value Averaging. This investment technique was introduced in his book, Value Averaging: The Safe and Easy Strategy for Higher Investment Returns.

Why You Should Consider Dollar Cost Averaging

Dollar cost averaging is so effective because you can get started fairly easily with a small amount of money and consistently invest over time. You don’t need a huge amount of capital to get started.

You can start investing through payroll allotments in your TSP with as low as 1% of your salary. Some plans even allow you to begin investing with less than that.

For example, many online brokers don’t have a minimum required amount to open an account. Many of the large mutual fund companies will let you get started with an initial deposit of between $25 and $100 and a monthly investment of between $25 and $50. You can set it up so that your investment automatically comes out of your bank account each month on a certain day.

Most brokerages will also allow you to make a recurring investment, so your investment is totally automated.

Throughout all this time, you are investing consistently. You continue to invest even when the market is down (more shares for your money!).

Historically, the market has risen over time. With a buy and hold strategy that involves an index fund or a very carefully chosen stock (consider a dividend aristocrat; many online brokerages will automatically reinvest your dividends without charging a transaction fee), you can build your wealth gradually, benefiting from the fact that you are consistently buying shares. For most of us “regular” folks, that’s the best we can hope for — and it’s a fairly tried and true way to build wealth while limiting risks.

There is still risk involved in investing, and you still need to be careful. However, you can reduce some of your risks, and build a consistent nest egg, if you follow a dollar cost averaging strategy.

Conclusion – DCA is the Easiest Way to Consistently Invest

The point of dollar cost averaging is not to try and time the market – it is to save or invest with amounts of money you can afford. The amount you can invest could be as low as $25 a month or into the thousands. The point is to get into the habit of investing, and dollar cost averaging provides investors with an easy and affordable way to invest money regularly.

Dollar Cost Averaging is the easiest way for most people to consistently invest in the stock market. This can easily be accomplished through automatic payroll deductions, such as 401k contributions, monthly IRA contributions, and other automatic investments.

That said, stock prices go up, and stock prices go down. No investment method will guarantee gains in the stock market. However, it is safe to say that using dollar cost averaging or value averaging provides a system to follow and promotes disciplined investing. And disciplined contributions are key to reaching your financial goals.

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  1. George says


    I’m a new small time invester… What do you think about my following strategy:

    1. diverisifying my portfolio: I’ve invested $500 to $1500 between some ten stocks to a total of around 8000 bucks in the last month. This is split between blue chip and newer companies or companies that are currently undervalued and have potential for growth across different sectors like tech, airline, financials, healthcare
    2. Dollar cost averaging:I’m setting aside 1000 bucks a month to invest into the market. My plan now is to top these existing investments 1000 bucks each when they go much lower than my initial cost.
    3. I might buy more new stocks along the way to increase my portfolio if there isn’t a drastic dip in any existing stock
    Would appreciate your thoughts on this strategy.


  2. Randa says

    With the way the market is now, and with the prediction that another crash is going to happen this year when inflation catches up with us, alongside the resulting unemployment increase; would you start an IRA now, or wait a year or two to see how things turn out?

    • Ryan Guina says

      I would start an IRA as soon as possible – in general, the longer you have your money in the market, the better. Additionally, it is virtually impossible to time the market. If you have concerns regarding investing all at once, then invest on a monthly plan or contribute several times per year. They key is to just get started.

  3. Felicia says


    Open an IRA or Roth IRA, and have money automatically sent to that account each week/month, depending on your budget. It’s actually quite simple; research those that have no fee/opening minimum, if you don’t have the available cash at the moment. I used to open my 1st Roth account, on a very limited budget. Best of Luck.

  4. Dokuen says

    DGI, without reading your report and assumptions it is impossible for us accept your claims on faith. I assume that you assumed (here we go) each investor had a lump sum available to invest. For example, given 2 investors with $10k did you assume the DCA investor held their funds in a non-interest bearing account while buying shares on a monthly basis and the LS investor put it all in the market? Not really a fair comparison if that is your case. When I have a lump sum, I put it in the market…when I don’t I DCA. I constantly buy stocks. Yes, I kept buying while the market tumbled and I am still buying now. I have yet to find anyone that can consistently beat DCA over time by timing the market.

  5. dan says

    Its called INVESTING not GAMBLING! We dont ask our broker to put it all on #7 and spin the wheel. I like the idea of DCA! As Andy (above) mentioned “right now was not the time for investing and just to stay out of the markets for now!, I ask when is the bottom?

    Yes there are good points and bad, but at the end of the day just think if andy would have bought through a DCA program over the last twelve months he would be much happier and not terrified from times to come as the market comes back over time. Also, some investors dont have a lump of 10K+. its an option as opposed to an obligation!

  6. Budgets are Sexy says

    Great post! I never hear of “Value averaging” all that much, so it was cool to read about something new to me. well put 🙂

  7. Writer's Coin says

    Interesting alternative to DCA—I had never heard of it. While it does come across as market timing in sheep’s clothing, there is something “automatic” to it that keeps it from feeling like market timing. Definitely worth a shot.

  8. Dividend Growth Investor says

    I guess with value averaging you try to time the market by trying to buy low and not buy when it’s high. The problem is that during bull markets the prices only keep getting higher.. And in bear markets the prices keep getting lower.

    I think that dollar cost averaging should work best for most people. Just set it, put it on autopilot and forget it.

    My man from disciplined investing just published an article about returns of investors who time mutual funds versus buy and hold a simple index fund.

  9. Ryan says

    Laura: I think that could bring in better returns over the long run, but you need to keep in mind that it may take a couple weeks for the changes in your 401(k) to take effect (while waiting for the next pay period).

    Donny G: Good point – and definitely not the way to go. I just go after asset allocation coupled with low fees.

    Jarhead: Yes and no. If you follow value averaging by the book, there could be times when you don’t contribute anything, or times when you contribute multiples of your normal contribution. I don’t think it is something I would follow to the letter, but in times when the entire market is down (such as now), I would consider upping my contributions if I could afford it.

  10. Alisa says

    Thank you for the insight. I guess as an investor you have to really monitor the performance of your portfolio and decide what works best for you. Be well.

  11. Jarhead says

    Couldn’t value averaging make you invest more or less depending on the market then you plan?

    I.E. I you start with $1000 in Jan and you want it to average $1000 /month if the market falls every month. Or if it goes up every month you are only putting in 800-900.

    Or do I stop when I hit my limit or contribute more if I haven’t reached my limit?

  12. Donny Gamble says

    A lot of people who just put money into their roth ira’s or mutual funds don’t really implement these two system currently. They just put their money in the most profitable mutual fund that has been giving the highest rate of return. They almost never choose the proper fund that they should choose.

  13. Laura K says

    Thanks for the explanation. What do you think about increasing 401k contributions when the market’s doing poorly and lowering them back to normal levels as it gains, provided you are still contributing as much as you originally planned for the year?

  14. Ryan says

    DGI: I think that is the point – for most people, DCA is the easiest way to invest (especially for 401(k) plans which require payroll deductions). Set it up once and forget about it until it is time to do an annual portfolio rebalance. For those who actively trade and invest (such as yourself), DCA is probably not the way to go. I’m in favor of DCA if it means someone will invest rather than spend the money without thinking about it.

  15. Dividend Growth Investor says

    I did a study on DCA using historical prices from VFINX ( Vanguard S&P 500 mutual fund) from 1988-2007 and concluded that dollar cost averaging doesn’t work most of the time. It only outperformed a lump sum investment for contributions beginning in 1994, 2001, 2002 and 2008.
    Anyways, it’s still being done however, as most people get their retirement contributions every other week or every month from their paychecks..

  16. Ryan says

    Eric: True, but it can work the opposite way as well. I think for most people it is just the easiest way to incorporate investing into their habits (payroll deductions for a 401(k) are a prime example).

    Andy: The problem with that approach is that it relies on timing the market and many people don’t know enough about the market to know when it has bottomed out. DCA allows people without much investing knowledge to put in money when they have it instead of trying to time the market. If you are a serious investor and are well versed in the markets, then lump sum investing is probably a better bet.

  17. Andy says

    Good concept but in today’s market where we are seeing huge falls, DCA may not be the best approach. Wait till the bottom (or when things stabalize from the near panic we are in) and then do a lump sum investment. Or even better just stay out of the market for now!

  18. Eric says

    I like the example in the intelligent investor where graham talks about lumping a single time investment of 10k into the market in the 1920’s, verse stretching that investment out over time. It really highlights the benefits of dollar cost averaging and how it not only limits you losses when the market takes a hit, but can actually increase your investments value.

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