Dollar-Cost Averaging: Pros, Cons, and Examples
Dollar-cost averaging (DCA) means investing the same amount at regular intervals, such as $500 every month, whatever the market is doing. You buy more shares when prices are low and fewer when they are high. If you invest from each paycheck through a 401(k), you already do it. The harder question is what to do with a lump sum, such as an inheritance or a bonus: invest it all now, or feed it in over a year? We tested that on U.S. stock market data back to 1871. Investing all at once came out ahead 72% of the time, but dollar-cost averaging lost far less in the worst years.
The Short Answer
- Investing from each paycheck is dollar-cost averaging, and it is the right default. You invest money as you earn it, so there is no lump sum to time.
- With a lump sum, investing it all at once usually wins. In our test on S&P Composite total returns, a lump sum beat 12 monthly installments in 71.5% of the 1,818 starting months from 1871 to 2022, by about 5 percentage points on average after one year.
- Dollar-cost averaging wins when a crash comes early. Starting in September 1929, the lump sum lost 30.7% in a year; spreading it over 12 months lost 8.3%.
- Choose DCA for a lump sum if a big early loss would make you sell, or if you are investing far more than you are used to. Set the schedule and stick to it.
How Dollar-Cost Averaging Works
| Month | Amount invested | Share price | Shares bought |
|---|---|---|---|
| 1 | $500 | $25 | 20.00 |
| 2 | $500 | $20 | 25.00 |
| 3 | $500 | $22 | 22.73 |
| 4 | $500 | $18 | 27.78 |
| 5 | $500 | $24 | 20.83 |
| 6 | $500 | $28 | 17.86 |
| Total | $3,000 | Average price $22.83 | 134.20 |
Because the same $500 buys more shares when the price is low, your average cost per share ($3,000 ÷ 134.20 = $22.36) ends up below the average of the six prices ($22.83). That is the whole mechanism. It does not guarantee a profit: if the price keeps falling, you are still buying into a falling market, and if it rises steadily, you would have done better buying everything in month one. The SEC's definition puts it the same way: investing equal amounts at regular intervals means you "buy more of an investment when its price is low and less of the investment when its price is high."
Lump Sum vs. Dollar-Cost Averaging: 150 Years of Data
We compared two ways to invest the same amount in the U.S. stock market (Robert Shiller's S&P Composite series, dividends reinvested): all of it at the start of a month, or one twelfth at the start of each of the next 12 months, with the waiting cash earning nothing. We measured both 12 months after the start, when the DCA investor is fully invested, for every starting month from January 1871 to June 2022.
| Result | 1871 to 2022 starts |
|---|---|
| Starting months tested | 1,818 |
| Lump sum ahead after 12 months | 1,299 (71.5%) |
| Average lead of the lump sum | 5.1 percentage points |
| Average margin when the lump sum won | 9.8 points |
| Average margin when DCA won | 6.5 points |
| Lump sum ahead, starts from 1950 on | 76.4% |
The reason is simple: stocks have risen in most years, so money waiting on the sidelines usually misses gains. A lump sum is fully exposed from day one, which is an advantage most of the time and a painful one when a crash comes early.
What Happened in Famous Starting Months
| Start | Lump sum after 12 months | 12-month DCA after 12 months |
|---|---|---|
| September 1929 | −30.7% | −8.3% |
| August 1987 | −17.2% | +0.1% |
| March 2000 | −16.8% | −15.4% |
| October 2007 | −35.7% | −28.0% |
| September 2008 | −11.6% | +17.3% |
| March 2009 | +55.8% | +19.3% |
| February 2020 | +20.7% | +21.6% |
| December 2021 | −15.0% | −4.7% |
Starting just before a crash, DCA softened the blow every time. Starting at the bottom (March 2009), it cost a lot of the recovery. Nobody knows in advance which kind of month it is, which is why the 72% figure matters more than any single example. See every bull and bear market since 1946 for how often the bad starts come.
Pros and Cons
| Pros | Cons |
|---|---|
| Removes the decision of when to invest | With a lump sum, usually ends with less money than investing at once |
| Limits regret if the market drops right after you start | Cash waiting to be invested earns less than stocks most of the time |
| Builds a habit; can be fully automated | Does not protect you in a long decline; you keep buying as prices fall |
| Lets you invest small amounts from each paycheck | Per-trade fees, where they still exist, add up with frequent purchases |
When to Use It
- Regular contributions from income: always. A 401(k), IRA or brokerage auto-investment plan does this for you.
- A lump sum and a long horizon, and you would hold through a 30% drop: history favors investing it now.
- A lump sum that is large compared with what you already have invested, or you know a fast loss would make you sell: spread it over 6 to 12 months on a fixed schedule. Keep the waiting money in a high-yield savings account or money market fund.
- Money you need within a few years: neither. Keep it out of stocks; see bonds vs. stocks.
How to Set It Up
- Pick the investment, usually a broad, low-cost index fund. See should you invest in S&P 500 index funds?
- Choose the amount and day, ideally right after payday.
- Automate it with your broker's recurring investment feature or your 401(k) contribution rate.
- Do not pause in a downturn. Those are the purchases that buy the most shares.
- Review once a year and raise the amount when your pay rises. The compound interest calculator shows what a steady monthly amount can grow to.
To see what you own and what you paid, use one of the portfolio trackers we reviewed; for researching individual companies, see stock analysis tools.
FAQ
Is dollar-cost averaging a good strategy?
For investing from each paycheck, yes: it is how most people invest and keeps them investing. For a lump sum, it usually ends with less money than investing at once (in 71.5% of starting months in our test since 1871), but it reduces the damage when a crash comes soon after you start.
Is it better to invest a lump sum or dollar-cost average?
Historically the lump sum, about seven times in ten, by around 5 percentage points after a year. Choose dollar-cost averaging if a big early loss would push you to sell.
How long should I dollar-cost average a lump sum?
Usually 6 to 12 months. The longer the period, the more of your money sits in cash missing gains in a rising market.
Weekly or monthly?
It makes little difference over long periods. Match it to your pay schedule and make sure your broker does not charge per purchase.
Does dollar-cost averaging work for crypto or single stocks?
The arithmetic works the same, but it does not make a risky investment safe. If the price falls and never recovers, regular buying just means owning more of something that lost value.
Sources
- Robert J. Shiller, Online Data, ie_data.xls (monthly S&P Composite prices and dividends from 1871, data through June 2023 dividends). Every backtest figure on this page is our calculation from this file.
- SEC Investor.gov, Dollar Cost Averaging
This article is for general information and is not investment advice. The backtest uses a historical index, not a fund you can buy, excludes fees and taxes, and past results do not predict future ones. Figures calculated on 2026-10-23.
