Dollar-cost averaging (DCA) removes the stress of market timing by investing fixed amounts at regular intervals. This calculator shows how DCA works and compares it to lump-sum investing to help you choose the right strategy.
How This Calculator Works
This calculator models dollar-cost averaging:
- Total Investment Amount: Money you want to invest
- Investment Frequency: Weekly, monthly, or quarterly
- Time Period: How long you'll spread out investments
- Expected Return: Projected market growth rate
- Comparison: DCA vs lump-sum investing outcomes
- Average Cost: Your average purchase price per share
The Formula Explained
DCA Purchases More Shares When Prices Are Low
Average Cost per Share = Total Invested / Total Shares Purchased
Example: Invest $500/month. Month 1: $50/share = 10 shares. Month 2: $40/share = 12.5 shares. Month 3: $45/share = 11.1 shares. Average cost: $1,500 / 33.6 shares = $44.64/share (lower than simple average of $45)
Step-by-Step Example
$12,000 Investment Over 12 Months
| Strategy | Invested | Shares | Value at Year End* |
| Lump Sum (January) | $12,000 day 1 | 120 @ $100 | $13,200 |
| DCA ($1,000/month) | $12,000 over year | 127.3 (avg $94.26) | $14,003 |
*Assuming market dropped mid-year then recovered. DCA bought more shares at low prices.
Note: In steadily rising markets, lump-sum typically wins. DCA wins in volatile or declining-then-recovering markets.
Frequently Asked Questions
What is dollar-cost averaging?
Dollar-cost averaging means investing a fixed dollar amount at regular intervals, regardless of market price. When prices are high, you buy fewer shares; when low, you buy more. This automatically follows the "buy low" principle without requiring market timing decisions.
Is dollar-cost averaging better than lump-sum investing?
Historically, lump-sum investing wins 60-70% of the time because markets trend upward over time. However, DCA: (1) Reduces timing risk, (2) Feels psychologically safer, (3) Performs better in volatile/declining markets, (4) Is the only option when you earn money over time (paychecks). DCA wins on peace of mind; lump-sum wins on returns.
When should I use dollar-cost averaging?
Use DCA when: (1) You receive money over time (salary), (2) You're nervous about investing a lump sum, (3) Markets feel uncertain or overvalued, (4) You'd regret investing everything right before a crash. If you have a lump sum and can handle volatility, lump-sum is mathematically optimal.
How does DCA reduce average cost?
When prices drop, your fixed dollar amount buys more shares. When prices rise, you buy fewer shares. Over time, you accumulate more shares at lower prices than at higher prices. This mathematically lowers your average cost compared to buying equal shares at each price point.
What interval should I use for dollar-cost averaging?
Monthly is most common (aligns with paychecks). Weekly vs monthly makes little difference long-term. The key is consistency and automation. Set up automatic investments to remove decision-making friction. Don't let money sit uninvested while "waiting."
Does dollar-cost averaging work in a bear market?
DCA shines in bear markets and volatile markets. While your early purchases lose value, you keep buying more shares at lower prices. When market recovers, you own significantly more shares than you would have with a lump sum. This accelerates recovery of your portfolio.
What are the downsides of dollar-cost averaging?
Limitations: (1) Underperforms lump-sum in rising markets—money sitting uninvested misses growth. (2) Doesn't protect against long-term declines—just spreads out the loss. (3) Requires discipline—you must continue investing when markets drop (hardest psychologically). (4) Transaction costs can add up with frequent purchases (though many platforms are free now).
How is DCA different from value averaging?
Dollar-cost averaging: Invest fixed dollar amount regardless of portfolio value. Value averaging: Adjust investment to hit target portfolio value—invest more when portfolio drops, less when it rises. Value averaging is more complex but may improve returns slightly. DCA is simpler and easier to automate.
Key Points to Remember
- Removes timing decisions: No need to predict market direction
- Automate everything: Set up recurring investments and forget
- Best for ongoing income: Paychecks naturally create DCA
- Lump-sum often wins mathematically: But DCA wins on peace of mind
- Continue in bear markets: That's when DCA provides the most benefit