Dollar-cost averaging (DCA)
Dollar-cost averaging (DCA), or periodic contribution, is a very simple strategy: always invest the same amount of money at regular intervals (for example, €200 on the 1st of each month), no matter what the market does. You neither try to guess when it is cheap nor wait for the "perfect moment".
The problem it solves: market timing
Market timing is trying to get the best moment to buy or sell right. It sounds logical ("I'll buy when it's low"), but it is enormously difficult, even for professionals: nobody knows the bottom until it has passed. Trying usually leads to sitting out the rallies or buying on impulse during the euphoria.
DCA removes that decision: you automate the contribution and stop playing guessing games.
How it lowers your average price
Here is the magic. Because you invest a fixed amount, you automatically buy more units when the price is low and fewer when it is high. That lowers your average purchase price.
Example: you invest €200 a month for 4 months in a fund whose price per unit varies:
| Month | Price | Investment | Units bought |
|---|---|---|---|
| 1 | €10 | €200 | 20.00 |
| 2 | €8 | €200 | 25.00 |
| 3 | €5 | €200 | 40.00 |
| 4 | €8 | €200 | 25.00 |
| Total | — | €800 | 110.00 |
Average price paid = €800 / 110 = €7.27 per unit. Notice: it is cheaper than the simple average of the prices (10+8+5+8)/4 = €7.75, because you bought more units exactly when it was cheap.
DCA is not the same as "averaging down"
Be careful not to confuse them:
- DCA: contributing a fixed amount in a planned, constant way, up or down, as a habit. It is a discipline strategy.
- Averaging down: putting more money into something you already own and that is falling, to lower your average price. It can make sense, but it is also dangerous if you "average" a company heading for ruin ("catching falling knives").
Advantages and nuances
- Removes anxiety and disciplines saving: you invest no matter what.
- Reduces the risk of putting everything in on the worst day.
- Honest nuance: if you had a large amount today and the market rises on average over the long term, statistically investing it all at once tends to yield slightly more than spreading it out. DCA shines mainly when you save bit by bit (which is almost everyone's case) and for its psychological effect.
The nuance nobody tells you: DCA vs. lump sum
If a large amount lands in your lap (an inheritance, a severance payment), the question arises: invest it all today or spread it over 12 months? Because markets rise on average over the long run, spreading means keeping part of the money out while it (probably) climbs: statistically, investing the lump sum wins about two times out of three. DCA-ing a large amount is mainly psychological insurance against piling in just before a drop and regretting it.
This does not contradict DCA from your salary: there you don't choose between lump sum and spreading, because the money arrives month by month. Investing each paycheck is simply lump-sum investing… as soon as you have it.
What to do
Automate a recurring order into an index fund and forget the market calendar. If you receive a large amount at once and your stomach allows, investing it now usually pays more; if it keeps you up at night, spread it over 6-12 months. What rarely pays off is leaving it in the account waiting for the perfect moment.
This is educational information, not investment advice.