Dollar-Cost Averaging (DCA)
Dollar-cost averaging is an investment strategy where you invest a fixed dollar amount at regular intervals, regardless of price. It reduces the risk of investing a large sum at the wrong time.
By investing a fixed amount each month (e.g. $500 into an index fund), you automatically buy more shares when prices are low and fewer when prices are high. Over time, your average cost per share is lower than the average price.
DCA is the default behaviour for most payroll-deducted retirement contributions (401k, RRSP, superannuation). It removes the temptation to time the market and enforces consistent saving habits.
Research shows DCA underperforms lump-sum investing in trending bull markets, but it outperforms lump-sum in volatile or declining markets and carries lower emotional risk for most investors.
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Open calculator →Related terms
- Rate of Return
- A rate of return (RoR) is the net gain or loss of an investment over a specified period, expressed as a percentage of the initial investment.
- Compound Interest
- Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.
- Index Fund
- An index fund is a portfolio of stocks or bonds designed to replicate the performance of a market index, such as the S&P 500. Index funds have lower fees than actively managed funds because no stock-picking is required.