Dollar-Cost Averaging — In Plain Words

This page is educational only. It is not financial advice.

Every fact on this page comes from two official sources.

One source is FINRA's explainer, “The Benefits and Limitations of Dollar-Cost Averaging.”

The other source is the Investor.gov glossary entry, “Dollar Cost Averaging.”

Investor.gov is the U.S. Securities and Exchange Commission's investor education site.

This page puts those two sources into plain words.

Where the two sources word something differently, this page prints each version with its source named.

It does not merge them into one version.

The short answer

FINRA defines dollar-cost averaging this way.

With dollar-cost averaging, an investor invests money in equal portions, at regular intervals, regardless of current market conditions.

Investor.gov defines it this way.

Dollar-cost averaging means investing money in equal portions, at regular intervals, regardless of the ups and downs in the market.

The dollar amount stays the same each time.

The price does not stay the same.

So the same amount buys a different amount of the investment each time.

FINRA states that result in shares.

FINRA says an investor buys more shares of an investment when the price is low and fewer shares when the price is high.

Investor.gov states the same result without the word “shares.”

Investor.gov says an investor buys more of an investment when its price is low and less of the investment when its price is high.

FINRA's own example

This is FINRA's own example, from FINRA's explainer.

The figures are FINRA's own figures.

Assume you have a pool of money to invest—say $10,000—perhaps from savings, a bonus or an inheritance. Instead of investing all of that money at once, you might invest $1,000 a month for 10 months with dollar-cost averaging. In the meantime, you might hold the balance in a low-risk, easily accessible account so it's ready for future withdrawals according to your schedule. — FINRA, “The Benefits and Limitations of Dollar-Cost Averaging”

FINRA gives a second example.

FINRA says that investing in a 401(k) or other type of employer-sponsored defined contribution plan is likely already dollar-cost averaging.

In FINRA's description, the contributions to the plan from each paycheck are allocated to one or more investment options on a regular, fixed schedule regardless of what the market is doing.

FINRA calls that an example of dollar-cost averaging.

The Investor.gov glossary entry gives no dollar example and names no plan type.

What FINRA lists as potential benefits

FINRA prints these points under the heading “Potential Benefits of Dollar-Cost Averaging.”

FINRA's words are hedged words — “can,” “might,” and “sometimes” — and this page keeps those hedges.

Emotion and impulse.

FINRA says some investors get fearful and sell when markets go down, potentially missing out on gains when the market goes back up.

FINRA says other investors might be tempted to rush in when markets go up, possibly then ending up buying just before prices drop.

FINRA says that by setting up a disciplined schedule of investments made regardless of market fluctuations, dollar-cost averaging can remove some of the emotion from investing and might help an investor avoid making impulsive decisions.

Average price per share.

FINRA says that since roughly the same amount of money is invested at each interval, buying more shares when the price is low and fewer shares when the price is high sometimes results in paying a lower average price per share over time.

FINRA's word is “sometimes.”

It is not printed as an every-time result.

Money not yet invested.

FINRA says that by investing gradually, as opposed to using all investment funds at once, dollar-cost averaging can help limit losses in the event of significant market declines.

FINRA gives the reason in the next sentence.

The money set aside and not yet invested would be unaffected by the drop.

What Investor.gov says about risk

Investor.gov states its risk point in one sentence.

Investor.gov says this investment strategy can help an investor manage risk by following a consistent pattern of adding new money to an investment over a long period of time.

Investor.gov's word is also “can.”

The Investor.gov glossary entry does not discuss emotion, average price per share, fees, or investing all at once.

Those topics appear only in the FINRA source.

Limitations and cautions — read this section as carefully as the benefits

FINRA prints its cautions under its own heading, “Limitations of Dollar-Cost Averaging.”

This section prints those cautions in full.

In the shortest plain words: dollar-cost averaging does not assure a profit, and it does not protect against loss in declining markets. The schedule involves continued investing through price swings, including periods of low prices. Whether an investor is able and willing to keep buying through those periods is part of the choice the schedule requires.

Lower returns than investing all at once.

FINRA says that while dollar-cost averaging can be a helpful tool in lowering risk, following this strategy can also potentially impact returns.

FINRA says holding onto money as cash longer and spreading out investments gradually has lower risk but often produces lower returns than lump sum investing, especially over longer periods of time.

FINRA states the trade-off this way.

Dollar-cost averaging may reduce the impact of short-term market swings, and an investor could also miss out on some gains since part of the money stays in cash instead of being invested right away.

The exception FINRA prints for paycheck contributions.

FINRA says that opportunity cost argument does not apply when funds are coming from a defined contribution plan.

FINRA's reason is that the money is being invested as it is earned, not held in cash for future investment.

Fees.

FINRA says that if commissions or other fees are paid for each transaction, dollar-cost averaging might result in higher fees than lump sum investing, due to the greater number of transactions.

FINRA says those fees could erode returns.

Money sitting on the sidelines.

FINRA flags the money that is sitting on the sidelines while a dollar-cost averaging strategy is being carried out.

FINRA says dipping into the funds set aside might impact long-term financial plans.

Risk tolerance.

FINRA closes with this point.

FINRA says it is important to consider potential returns as well as tolerance for risk and volatility.

Investor.gov's glossary entry prints no limitations section.

Its only risk wording is the “can help you manage risk” sentence printed above.

Where the two sources differ

The two sources do not contradict each other on any fact.

They differ in wording and in how much they cover.

This page prints the differences instead of merging them.

The market wording.

FINRA: “regardless of current market conditions.”

Investor.gov: “regardless of the ups and downs in the market.”

The time wording.

Investor.gov's definition describes adding new money “over a long period of time.”

FINRA's definition states no length of time.

FINRA's own worked example runs for 10 months.

Shares or investment.

FINRA: “buy more shares of an investment” when the price is low, and “fewer shares” when the price is high.

Investor.gov: “buy more of an investment” when its price is low, and “less of the investment” when its price is high.

Coverage.

FINRA covers the choice between investing all at once and investing over a period of time, the emotion point, the average-price point, fees, and money on the sidelines.

The Investor.gov glossary entry is three sentences long and covers none of those topics.

FINRA also adds the average-price sentence — that the pattern sometimes results in paying a lower average price per share over time.

The Investor.gov entry contains no average-price sentence.

What this page does not cover

This page does not say whether dollar-cost averaging fits any one person's situation.

Neither source decides that for a reader, so this page does not either.

This page prints no example with invented numbers.

The only dollar figures on this page are FINRA's own example figures, printed above with FINRA named.

This page names no broker, no fund, and no product for sale.

The only plan type named on this page is the one FINRA names in its own example.

This page is educational only. It is not financial advice.