Dollar-Cost Averaging (DCA) Calculator
Explore how investing a fixed amount regularly can smooth out market volatility and potentially lead to better long-term returns.
DCA Parameters
DCA Simulation Results
Amount per Purchase
$100.00
| Period | Price | Shares Bought | Total Shares | Total Invested | Current Value |
|---|---|---|---|---|---|
| 1 | $10.00 | 10.00 | 10.00 | $100.00 | $100.00 |
| 2 | $10.79 | 9.27 | 19.27 | $200.00 | $207.89 |
| 3 | $10.67 | 9.37 | 28.64 | $300.00 | $305.62 |
| 4 | $12.21 | 8.19 | 36.83 | $400.00 | $449.78 |
| 5 | $13.11 | 7.63 | 44.46 | $500.00 | $582.68 |
| 6 | $14.10 | 7.09 | 51.55 | $600.00 | $726.80 |
| 7 | $12.89 | 7.76 | 59.31 | $700.00 | $764.30 |
| 8 | $12.99 | 7.70 | 67.01 | $800.00 | $870.37 |
| 9 | $12.14 | 8.24 | 75.25 | $900.00 | $913.21 |
| 10 | $11.71 | 8.54 | 83.79 | $1000.00 | $980.84 |
| 11 | $9.85 | 10.15 | 93.94 | $1100.00 | $925.68 |
| 12 | $8.30 | 12.05 | 105.99 | $1200.00 | $879.49 |
The Strategy of Dollar-Cost Averaging
Dollar-Cost Averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset (e.g., stocks, mutual funds) in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals.
By investing a fixed dollar amount regularly, you buy more shares when prices are low and fewer shares when prices are high. Over time, this strategy can lead to a lower average cost per share than if you invested the entire sum at once (lump sum investing), especially in volatile markets.
Benefits of DCA:
- Reduces Risk: Mitigates the risk of investing a large sum just before a market downturn.
- Emotional Discipline: Removes the temptation to time the market, which is notoriously difficult.
- Lower Average Cost: You naturally buy more shares when prices are low.
- Simplicity: Easy to implement and stick to over the long term.
Considerations for DCA:
- May Underperform in Bull Markets: In consistently rising markets, lump sum investing often outperforms DCA.
- Fees: Frequent purchases might incur more transaction fees, though many platforms now offer commission-free trading.
- Long-Term Strategy: DCA is most effective when applied consistently over many years.
Frequently Asked Questions
Is Dollar-Cost Averaging always better than lump sum investing?
Not always. Studies often show that lump sum investing (investing all your money at once) tends to outperform DCA in consistently rising markets, as your money is exposed to the market for a longer period. However, DCA is a powerful strategy for managing risk and emotional investing, especially in volatile or uncertain markets, and for investors who receive income periodically (e.g., monthly salary).
Can I use DCA for retirement accounts like 401(k)s or IRAs?
Absolutely! In fact, many retirement accounts, especially employer-sponsored 401(k)s, are inherently set up for dollar-cost averaging, as contributions are typically deducted from each paycheck and invested automatically. This makes DCA a natural and effective strategy for long-term retirement savings.
What happens if the asset price goes to zero in the simulation?
In this simulation, we've added a safeguard to prevent the price from going to zero or negative, setting a minimum price of $0.1. In real-world investing, an asset's price can indeed drop to zero, resulting in a total loss of investment. This simulation is simplified to illustrate the DCA mechanism, not to perfectly predict market behavior.