What to know about dollar-cost averaging, an investing strategy to consider during market volatility (2024)

If you're already contributing money to a 401(k) retirement account, you may not have realized it, but you're practicing a popular investment strategy known as dollar-cost averaging.

Simply put, this approach means you're investing fixed, equal amounts on a regular basis, say monthly or bi-weekly, rather than investing one lump sum of cash all at once.

With a defined 401(k) contribution plan, for example, you're investing as you earn, regularly taking money from each paycheck throughout the year and putting it into the market. Dollar-cost averaging could also look like if you decide to invest $5,000 of your savings by splitting that cash into five parts, where $1,000 is invested each month for five months.

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Here's what to know about dollar-cost averaging

Dollar-cost averaging allows you to spread out your investments and buy into the market at different times at varying prices. In turn, these purchase prices ideally balance each other out, which is where the "averaging" part of the phrase comes from.

Experts often recommend this long-term investing approach (especially with broad market-tracking index funds) to people with low-risk appetites since contributing cash consistently over time reduces the impact of any market volatility on an investment. Not to mention, it allows investors to forget about the up and down movements of the market since their contributions aren't influenced by what's happening; they're making contributions at regular intervals no matter what. This helps leave emotion-based investing off the table.

Dollar-cost averaging vs. lump-sum investing

Dollar-cost averaging is often compared with its antithesis, lump-sum investing, an opposite approach otherwise known as simply timing the market.

Like dollar-cost averaging, lump-sum investing can also help you build wealth — and even better, maximize your returns — albeit with the caveat that you're taking on much more risk. After all, as we all know, no one can really time the market.

When investing a big wad of cash into the market all at once, your money gets put to work immediately. With dollar-cost averaging, however, only some of your money goes into the market to start and the rest is set aside for future contributions — this could allow you to catch future dips in the market, but your immediate gains may be smaller if the market takes off sooner than expected.

Is dollar-cost averaging right for you?

When investing with any method or strategy, the first step is to identify the potential returns as well as your risk tolerance.

Though you may get better returns over time with lump-sum investing, it's not a good idea for those looking to lower their short-term downside risk since the potential for loss is greater.

Risk-averse investors, or those worried about market volatility, are better off using the dollar-cost averaging investment approach. A good place to start is with an S&P 500 index fund which has shown an average annualized return of approximately 10% since 1957.

For example,Charles Schwab'sS&P 500 Index Fund is a straightforward option with no investment minimum. Its expense ratio is 0.02%, meaning every $10,000 invested costs $2 annually — index funds generally have a 0.2% expense ratio, so this is notably low.

Charles Schwab

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One®Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit

  • Fees

    Fees may vary depending on the investment vehicle selected. Schwab One®Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract

  • Bonus


  • Investment vehicles

    Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One®Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account

  • Investment options

    Stocks, bonds, mutual funds, CDs and ETFs

  • Educational resources

    Extensive retirement planning tools

Terms apply.

For an option with no expense ratio, consider the Fidelity ZERO®Large Cap Index Fund. Though the fund doesn't technically track the S&P 500, the Fidelity U.S. Large Cap Index tracks large capitalization stocks, whichthe website says, "are considered to be stocks of the largest 500 U.S. companies."

Fidelity Investments

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go®account, but minimum $10 balance according to the investment strategy chosen

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)

  • Bonus

    Find special offers here

  • Investment vehicles

    Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other:Fidelity Investments 529 College Savings; Fidelity HSA®

  • Investment options

    Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

  • Educational resources

    Extensive tools and industry-leading, in-depth research from 20-plus independent providers

Terms apply.

You can also consider investing a fixed monthly amount through a robo-advisor like Betterment, which will create a custom portfolio of ETFs (which are similar to index funds) for you based on your risk tolerance and investing horizon.


  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn't require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.

  • Fees

    Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash

  • Educational resources

    Betterment offers retirement and other education materials

Terms apply. Does not apply to crypto asset portfolios.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

As an expert in personal finance and investment strategies, I can confidently affirm that the article provides a comprehensive overview of the investment concept known as dollar-cost averaging. This proven strategy involves consistently investing fixed, equal amounts at regular intervals, such as monthly or bi-weekly, rather than making a lump sum investment all at once.

Let's break down the key concepts mentioned in the article:

  1. Dollar-Cost Averaging (DCA):

    • Definition: Dollar-cost averaging is an investment strategy where fixed amounts of money are regularly invested over time, regardless of market conditions.
    • Benefits: It allows investors to spread out their investments, buying into the market at different times and prices. This helps in balancing out purchase prices over the long term, reducing the impact of market volatility.
  2. Investment Vehicles:

    • 401(k) Retirement Account: A tax-advantaged retirement account where individuals can contribute a portion of their salary, and in this context, practice dollar-cost averaging by making regular contributions.
    • Index Funds: Specifically mentioned are broad market-tracking index funds, such as the S&P 500, which are often recommended for dollar-cost averaging due to their diversification and historical returns.
  3. Comparison with Lump-Sum Investing:

    • Lump-Sum Investing: This is presented as the opposite of dollar-cost averaging, involving investing a large sum of money all at once.
    • Risk and Return: Dollar-cost averaging is seen as a strategy suitable for risk-averse investors, as it mitigates the impact of short-term market fluctuations. Lump-sum investing, on the other hand, may offer potentially higher returns but comes with higher risk.
  4. Risk Tolerance and Choosing the Right Strategy:

    • Risk Tolerance: Investors are advised to assess their risk tolerance before deciding on an investment strategy.
    • DCA Suitability: Dollar-cost averaging is recommended for risk-averse investors or those concerned about market volatility.
  5. Suggested Investment Options:

    • S&P 500 Index Fund: Mentioned examples include Charles Schwab's S&P 500 Index Fund, known for its low expense ratio.
    • Fidelity ZERO® Large Cap Index Fund: Another option highlighted, offering zero expense ratio for certain types of trades.
  6. Alternative Investment Platforms:

    • Robo-Advisors: Betterment is suggested as an example, allowing investors to automate the process of investing a fixed monthly amount based on risk tolerance and financial goals.
  7. Educational Resources:

    • Brokerages' Educational Tools: Both Charles Schwab and Fidelity are mentioned as providing extensive retirement planning tools and educational resources.

In conclusion, the article effectively explains the principles of dollar-cost averaging, highlights its advantages for risk-averse investors, and provides concrete examples of investment options and platforms to consider. This information aligns with my extensive expertise in personal finance and investment strategies.

What to know about dollar-cost averaging, an investing strategy to consider during market volatility (2024)


What to know about dollar-cost averaging, an investing strategy to consider during market volatility? ›

The dollar-cost averaging method reduces investment risk, but it is less likely to result in outsized returns. The advantages of dollar-cost averaging include reducing emotional reactions and minimizing the impact of bad market timing

market timing
Timing the market is a strategy that involves buying and selling stocks based on expected price changes. Prevailing wisdom says that timing the market doesn't work; most of the time, it is very challenging for investors to earn big profits by correctly timing buy and sell orders just before prices go up and down.
https://www.investopedia.com › terms › markettiming

Is volatility good for dollar-cost averaging? ›

While these shifts can increase anxiety, we know a few things for sure. No one can predict what the market will do and when. History and time have shown that volatility often has an upside, especially when you use the dollar-cost averaging approach.

How does dollar-cost averaging work as an investing strategy? ›

Dollar cost averaging is the practice of investing a fixed dollar amount on a regular basis, regardless of the share price. It's a good way to develop a disciplined investing habit, be more efficient in how you invest and potentially lower your stress level—as well as your costs.

What are the 2 drawbacks to dollar-cost averaging? ›

Cons of Dollar Cost Averaging
  • You Could Miss Out on Certain Opportunities. Investing in the same stock or fund every month could cause you to miss out on other investment opportunities. ...
  • The Market Rises Over Time. ...
  • It Could Give You a False Sense of Security.
Sep 12, 2023

Why would an investor choose dollar-cost averaging over market timing or investment tracking? ›

Investors who use a dollar-cost averaging strategy will generally lower their cost basis in an investment over time. The lower cost basis will lead to less of a loss on investments that decline in price and generate greater gains on investments that increase in price.

Is it better to invest all at once or monthly? ›

Lump-sum investing is usually the better choice

There has been plenty of research done on this subject, so we have an answer on which investment strategy is better. Lump-sum investing outperforms dollar-cost averaging about two-thirds (68%) of the time, according to Vanguard.

What is the best measure of stock price volatility? ›

Volatility refers to how quickly markets move, and it is a metric that is closely watched by traders. More volatile stocks imply a greater degree of risk and potential losses. Standard deviation is the most common way to measure market volatility, and traders can use Bollinger Bands to analyze standard deviation.

How do investors benefit from dollar-cost averaging? ›

The advantage of dollar-cost averaging: by investing in smaller set amounts over time, you'll buy both when prices are low and high. This smoothes out your average purchase price. Dollar-cost averaging can be especially powerful in recessions and bear markets.

How often should you invest with dollar-cost averaging? ›

Consistency trumps timing

It sounds technical, but dollar cost averaging is quite simple: you invest a consistent amount, week after week, month after month (think payroll contributions going into your 401(k) account) regardless of whether the markets are up, down or sideways.

Why might an investor choose to utilize dollar-cost averaging? ›

Dollar-cost averaging makes a volatile market work to your benefit. By adding money regularly, you're going to buy at times when the market is lower, therefore lowering your average purchase price and actually acquiring more shares.

What are the flaws of dollar-cost averaging? ›

The advantages of dollar-cost averaging include reducing emotional reactions and minimizing the impact of bad market timing. A disadvantage of dollar-cost averaging includes missing out on higher returns over the long term.

What is better than dollar-cost averaging? ›

When you put all your money in at once, you're more likely to see results quickly. This can be a helpful motivator for a beginning investor. You will often see higher returns with lump sum investing compared to dollar-cost averaging.

Why do you think dollar-cost averaging reduces investor regret? ›

Dollar-cost averaging can help risk-averse investors avoid "buyer's remorse" if the market drops sharply since they wouldn't have just invested a big lump sum. Setting up a "mechanical" investment program based on regular savings can help build good financial habits.

Is Charles Schwab in financial trouble? ›

From August 2022 through March 2023, Charles Schwab lost deposits due to client cash sorting at a pace of $5.6 billion per month as yields on savings accounts or other safe short-term assets like certificates of deposits rose. These deposit outflow pressures slowed significantly following the regional banking crisis.

What is the best day of the week to buy stocks? ›

Timing the stock market is difficult, but understanding when to trade stocks can help your portfolio. The best time of day to buy stocks is usually in the morning, shortly after the market opens. Mondays and Fridays tend to be good days to trade stocks, while the middle of the week is less volatile.

Is it better to DCA or lump sum? ›

The data shows lump-sum investing often works in favour of investors. But if you are finding it hard to get back into the market, a DCA strategy can help you take that important first step. It can also provide a smoother investment experience.

What index is best for dollar-cost averaging? ›

If you're dollar-cost averaging into a poor investment, the way you bought in won't save you. The approach works best with broad-based funds such as an S&P 500 index fund, which has performed well over long time periods.

What is the best frequency for dollar-cost averaging? ›

Most investors prefer the monthly dollar cost averaging method. This is a more familiar frequency to those used to a SIPP plan where funds are taken directly from your salary and invested into your investment account.

What is the daily average volatility? ›

Daily Volatility is the average difference between the return on a given day and the average return over the time period. To calculate the Daily Volatility you first compute the daily returns over the period in question.


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