Dollar cost averaging

Dollar cost averaging (DCA) is an investment strategy in which a fixed amount of money is invested at regular intervals — weekly, fortnightly, or monthly — regardless of the asset’s price at the time. Over time, this approach smooths the average purchase price.

How dollar cost averaging works

When prices are low, the fixed contribution buys more units. When prices are high, it buys fewer. The result is an average cost per unit that is typically lower than the simple average price across the same period — a phenomenon driven by the harmonic mean of the prices paid.

Example

An investor commits to investing $1,000 per month into a share fund:

• Month 1: price $50/unit → buys 20 units
• Month 2: price $40/unit → buys 25 units
• Month 3: price $25/unit → buys 40 units
• Month 4: price $50/unit → buys 20 units

After four months, the investor has spent $4,000 and acquired 105 units — an average cost of $38.10 per unit, despite the simple average price being $41.25.

Strengths and limitations

Strengths:

• Removes the emotional pressure of timing the market
• Builds a long-term investing habit
• Reduces the regret of investing a lump sum just before a market fall

Limitations:

• A lump-sum investment usually outperforms DCA in markets that trend upward over the period
• DCA does not eliminate loss in falling markets — it only spreads the entry points
• The strategy works best when paired with the compound interest effect over a long horizon

DCA suits investors who receive regular income and want a disciplined, automatic approach.