Dollar-cost averaging is an investment technique in which a fixed dollar amount is invested at regular intervals, regardless of the asset’s current market price, with the intention of reducing the average purchase cost over time. The concept, coined by Benjamin Graham in 1949, emphasizes purchasing more shares when prices decline and fewer when prices rise, thereby smoothing the unit cost across varied market conditions. This approach, also referred to as pound-cost averaging or unit cost averaging, is distinct from a constant dollar plan, which focuses on rebalancing rather than routine fixed-amount purchases. The method is commonly employed in retirement accounts and systematic investment plans, where contributions recur monthly or quarterly without regard to short-term market movements. Some modern investors use dollar-cost averaging to enter volatile markets like cryptocurrencies, where market volatility can be extreme.
Mechanically, dollar-cost averaging requires investors to commit fixed sums at predetermined intervals, purchasing fractional or whole shares depending on the asset’s pricing and the brokerage’s capabilities, and the result is an accumulation pattern that naturally acquires more units during downturns and fewer during rallies. Examples include automated contributions to mutual funds or ETFs, and the technique applies to any asset permitting repeated purchases, although transaction costs and minimums can influence feasibility. The approach is often recommended to mitigate behavioral errors, since it reduces the need for market timing and curbs reactive decisions driven by volatility or sentiment.
The advantages of the strategy include lowering the risk of committing a large lump sum at an unfavorable peak, fostering disciplined investing habits, and preserving liquidity for other needs, while also potentially increasing aggregate shares purchased during protracted declines. These practical benefits make the method accessible to novice investors and useful where fractional-share purchasing is available, improving diversification and accumulation over time. Nevertheless, limitations persist, as dollar-cost averaging can underperform lump-sum investing in steadily rising markets, does not eliminate market-wide risk, and requires persistence to realize statistical averaging benefits. Quantitative examples show scenarios where DCA acquires more shares than a single purchase and reduces average cost per share, but investors should weigh horizon, volatility, and transaction factors before adopting the strategy. DCA is sometimes contrasted with lump-sum investing, with studies showing immediate investment of a windfall often outperforms delayed investing two-thirds of the time. Additionally, investors should consider rebalancing frequency when integrating DCA into broader portfolio strategies.
