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What is dollar-cost averaging?

By
Hannah Glenn
May 3, 2018
5 min read
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What is dollar-cost averaging?

Dollar-cost averaging (DCA) is the investment strategy of spreading out your stock purchases and buying on a recurring basis in equal amounts. Instead of making one large purchase, you make several smaller buys.

When you invest this way, you average out your purchase price over time and ensure that you’re not jumping in at a high point for stock prices. It’s impossible to time the market – the experts say to not even bother trying. Instead, purchase throughout the year and the price you’ve paid per share will be averaged out over the highs and lows of the past 12 months.  

Does dollar-cost averaging work?

Over time, yes. DCA is an especially strong strategy during a down market. Purchasing stock at low points, when most investors are too afraid to buy, ensures that you take advantage of the dips without worrying about missing out on the “perfect” price.

When doesn’t it work?

When you’re purchasing stock through a platform that charges per trade (Swell doesn’t), DCA might not be the smartest move. But even if you are paying per trade, the costs associated when compared to the value of your portfolio over time should be tiny.

Theoretically, because you are never investing a lump sum of money at “just the right” time, you’re potentially missing out on the gains you could have had. But! Investors are notoriously terrible at predicting short-term movement of a stock or the market, so just let that one go.

How does it work?

By purchasing stocks with a set amount of cash each month, you mitigate the risks involved with trying to time the market, but you also get to take advantage of the price dips. Look at this excellent chart from Seeking Alpha:

dollar cost averaging example
Seeking Alpha DCA explainer

By buying with a steady stream instead of making a big splash, you get more for your money and come out on top.

How to get started

The first step is to find an investment platform that offers holdings you’re interested in. There are a lot of options when it comes to investing, but not all of them are as transparent as you’d like. Choose with your values in mind as well as your financial future.

The next step is simple: Set up a recurring monthly investment that falls within your budget. Having trouble setting a goal or wondering how much you should have saved? This savings guide can give you some direction.

Already have a Swell account? Log in and set up a recurring investment today.

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