Dollar-Cost Averaging

Dollar-cost averaging means investing the same amount of money at regular intervals, no matter what the market is doing. Maybe you invest $200 every payday into an ETF. Some months you’ll buy when prices are high, and some months you’ll buy when prices are low. Over time, this smooths out your average purchase price.

How it works in practice

Say you invest $500 per month into an index ETF. In January, the price is $50 per share, so you get 10 shares. In February, it drops to $40, so you get 12.5 shares. In March, it’s back to $50, so you get 10 again. After three months, you’ve invested $1,500 and own 32.5 shares. Your average cost per share is about $46.15, which is lower than the simple average price of $46.67.

The math isn’t dramatic, but the real benefit is behavioural. Dollar-cost averaging removes the pressure of trying to figure out the “right time” to invest.

Why it matters

One of the most common reasons people delay investing is the fear of buying at the wrong time. What if the market drops right after you put your money in? Dollar-cost averaging sidesteps that anxiety by spreading your purchases over time.

It’s not a guaranteed way to get better returns. Research shows that investing a lump sum all at once tends to outperform dollar-cost averaging more often than not, simply because markets go up more than they go down. We dig into the numbers in our dollar-cost averaging vs. lump sum guide. But if the alternative to dollar-cost averaging is doing nothing because you’re nervous about timing, then it’s a good strategy. The best approach is the one you’ll actually follow through on.