Dollar-Cost Averaging

Instead of investing a large sum all at once, an investor spreads purchases over time. The fixed amount automatically buys more shares when prices fall and fewer when prices rise.

For example, an investor puts 300 into a fund each month. In the first month, the price is 10, buying 30 units. In the second, the price is 12, buying 25 units. In the third, the price is 8, buying 37.5 units. After three months, they have invested 900 and own 92.5 units, at an average cost of about 9.73 per unit, slightly below the average price of 10.

Dollar-cost averaging reduces the risk of investing everything just before a market fall and removes the pressure of trying to time the market. It also builds a disciplined saving habit, which is why it underlies most workplace pension and monthly investment plans.

It does not guarantee a profit or protect against losses in a falling market. Because markets have tended to rise over time, investing a lump sum immediately has often produced higher returns on average than spreading it out. The method's main benefit is behavioural: it makes regular investing easier and less stressful.

The name refers to dollars, but the same approach applies in any currency, and it is sometimes called pound-cost averaging.