Skip to content
GetProfitable
Search
Dictionary

Dollar-cost averaging

Investing a fixed amount at regular intervals regardless of price, which buys more units when prices are low and fewer when they are high.

Example: $600 a month for four months at prices of $30, $20, $24 and $25 buys 20, 30, 25 and 24 units, or 99 units for $2,400. The average price paid is $24.24, below the $24.75 simple average of the four prices, because more units were bought at the cheaper levels.

The real benefit is behavioural. A schedule removes the decision of when to buy, which is the decision most people get wrong. It also matches how most people actually receive money, in monthly instalments from income.

Understand what it does not do. It does not reduce risk over the long run and, for a sum already in cash, it has historically lagged lump-sum-investing more often than not, because markets rise more often than they fall. It is regret insurance with a cost.

Related: lump-sum-investing, value-averaging, asset-allocation, sequence-of-returns-risk, rebalancing

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How a position size is worked outAccount size, risk per trade and stop distance feed into one box giving the number of shares.ACCOUNT SIZE$25,000your capitalRISK PER TRADE1%of the accountSTOP DISTANCE$0.50entry to stopPOSITION SIZE500 sharesrisk budget: $25,000 × 1% = $250position size: $250 ÷ $0.50 = 500 shares
Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.

Educational only, not advice. Spotted an error? Post in Site Feedback.