Dollar-cost averaging is an evergreen investing strategy built around regular contributions, broad diversification, low fees, and long-term consistency.
Choosing investments for dollar-cost averaging does not have to be complicated. For many investors, the most important factors are diversification, reasonable fees, strong liquidity, and the ability to continue investing through different market conditions.
Exchange-traded funds can provide broad exposure to an index or a specific part of the market with a single purchase. Individual stocks can also be used with DCA, although they generally carry more company-specific risk and require additional research.
What Is Dollar-Cost Averaging?
Dollar-cost averaging, commonly called DCA, is an investment approach in which you invest a fixed amount of money on a regular schedule. Instead of trying to predict the best day to invest, you contribute consistently whether prices are rising, falling, or moving sideways.
When prices are lower, your fixed contribution buys more shares. When prices are higher, it buys fewer shares. Over time, this can result in a purchase price that differs from the market price on any single day.
How Does DCA Work?
Suppose an investor contributes $300 every month to an ETF. The number of shares purchased changes depending on the ETF's price during each investment period.
| Month | Investment | Share Price | Shares Purchased |
|---|---|---|---|
| January | $300 | $50 | 6.00 |
| February | $300 | $40 | 7.50 |
| March | $300 | $60 | 5.00 |
| Total | $900 | — | 18.50 |
In this example, the investor buys 18.5 shares for a total of $900. The average cost per share is approximately $48.65, even though the three monthly prices were $50, $40, and $60.
10 Investments to Consider for DCA
The following ETFs and stocks are commonly researched by long-term investors. They are not ranked recommendations. Each investment has different objectives, risks, fees, and levels of diversification.
| Investment | Type | Primary Exposure | Why Investors Research It |
|---|---|---|---|
| VTI | ETF | Total U.S. stock market | Broad exposure across large, mid, and small-cap U.S. companies. |
| VOO | ETF | S&P 500 | Exposure to many of the largest publicly traded U.S. companies. |
| IVV | ETF | S&P 500 | A low-cost option for investors seeking large-cap U.S. equity exposure. |
| SCHB | ETF | Broad U.S. market | Diversified exposure to companies across multiple market-cap segments. |
| VT | ETF | Global stock market | Exposure to both U.S. and international companies in one fund. |
| QQQ | ETF | Nasdaq-100 | Concentrated exposure to large, non-financial Nasdaq-listed companies. |
| AAPL | Stock | Consumer technology | A widely followed company with a global brand and large ecosystem. |
| MSFT | Stock | Software and cloud technology | Exposure to enterprise software, cloud computing, and technology services. |
| BRK.B | Stock | Diversified holding company | Business exposure across insurance, transportation, energy, and other industries. |
| JNJ | Stock | Health care | A large, established health-care company followed by income-oriented investors. |
What Makes an Investment Suitable for DCA?
A DCA investment should be evaluated based on your goals, time horizon, risk tolerance, and overall portfolio. The fact that an investment is popular does not automatically make it appropriate for every investor.
- Diversification: Broad funds can reduce the impact of any single company's performance.
- Low costs: Expense ratios, commissions, and bid-ask spreads can affect long-term returns.
- Liquidity: Highly traded investments are often easier to buy and sell efficiently.
- Long-term suitability: Consider whether the investment supports your intended time horizon.
- Consistency: A simple investment plan is more useful when you can follow it through market volatility.
Benefits of Dollar-Cost Averaging
It reduces the pressure to time the market
Market timing requires investors to make two difficult decisions: when to sell and when to buy again. DCA replaces those decisions with a repeatable contribution schedule.
It can make investing more accessible
Investors do not need to wait until they have a large amount of money. Regular contributions can begin with an amount that fits a personal budget, especially when fractional shares are available.
It encourages disciplined behavior
Automating contributions can make investing part of a regular financial routine. This may help investors avoid allowing short-term headlines to determine every investment decision.
It can reduce emotional decision-making
Prices naturally fluctuate. A predetermined schedule can help investors continue participating during downturns instead of making decisions based only on fear or excitement.
Limitations of Dollar-Cost Averaging
DCA does not guarantee a profit and does not remove market risk. If the market rises steadily, investing a lump sum earlier may produce a higher return than gradually investing the same amount.
DCA also requires discipline. Investors may still experience losses, particularly over shorter time periods. In addition, investing in a single stock on a recurring schedule can create concentration risk if that company underperforms.
Before starting a DCA plan, consider maintaining an emergency fund, paying attention to high-interest debt, and reviewing the tax treatment of your investment account.
How Often Should You Invest?
Common schedules include weekly, biweekly, and monthly contributions. The best schedule is usually the one that matches your income and can be maintained for many years.
Many investors align contributions with their paychecks. This approach can make the process easier to automate and helps ensure that investing happens before the money is spent elsewhere.
Frequently Asked Questions
Is dollar-cost averaging better than investing a lump sum?
It depends on your circumstances. Lump-sum investing may provide greater long-term market exposure when you already have cash available, while DCA can make investing more comfortable and help reduce the risk of investing everything immediately before a decline.
How often should I use dollar-cost averaging?
Many investors contribute weekly, biweekly, or monthly. The most useful schedule is one that matches your income and can be followed consistently over a long period.
Can dollar-cost averaging guarantee a profit?
No. DCA does not eliminate investment risk or guarantee returns. The value of your investments can rise or fall, and you can lose money.
What investments can be used with DCA?
DCA can be used with many assets, including diversified stock funds, exchange-traded funds, mutual funds, and other investments that support recurring purchases.
Build a Consistent Investing Plan
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Try the DCA CalculatorThis article is for educational and informational purposes only and is not financial, investment, tax, or legal advice. StockDCA does not provide personalized investment recommendations. Always conduct your own research and consider consulting a qualified financial professional before making investment decisions.