How Often Should You Dollar-Cost Average? | Money Guy (2024)

FAQs

How Often Should You Dollar-Cost Average? | Money Guy? ›

How long should your Dollar Cost Average period be? Our typical rule of thumb is to systematically work the cash into the market over an 8-12 month period.

Pick a stock, fund, or other asset; then decide on a fixed amount to invest in it regularly. With dollar-cost averaging, you invest a set amount in the same asset at regular intervals, such as once a month or every payday. It doesn't matter what the price of the investment is.

Most investors prefer the monthly dollar cost averaging method. This is a more familiar frequency to those used to a SIPP plan where funds are taken directly from your salary and invested into your investment account.

Dollar cost averaging is the practice of investing a fixed dollar amount on a regular basis, regardless of the share price. It's a good way to develop a disciplined investing habit, be more efficient in how you invest and potentially lower your stress level—as well as your costs.

dollar Cost averaging is a popular investment strategy that involves investing a fixed amount of money at regular intervals, regardless of the market conditions. It is a strategy that works well in both bull and bear markets, but it can be especially beneficial in the latter.

Among the numerous investment strategies available, dollar-cost averaging is a popular and widely used approach. Its proponents range from Warren Buffett to average investors.

The Market Rises Over Time

If you don't increase your monthly investment over time, you may end up with fewer and fewer shares on average. If you can afford to make a lump-sum investment instead of dollar cost averaging, you could come out ahead if your timing is right.

Dollar-cost averaging is the practice of putting a fixed amount of money into an investment on a regular basis, typically monthly or even bi-weekly. If you have a 401(k) retirement account, you're already practicing dollar-cost averaging, by adding to your investments with each paycheck.

However, if it's a substantial amount like proceeds from selling land or a business, it's better to spread it out over 10 to 12 months. Now, regarding consistency, even if you receive an annual bonus, you can allocate a portion to long-term investing and put it in once a year. That's still dollar-cost averaging.

The strategy couldn't be simpler. Invest the same amount of money in the same stock or mutual fund at regular intervals, say monthly. Ignore the fluctuations in the price of your investment. Whether it's up or down, you're putting the same amount of money into it.

What are the two drawbacks to dollar-cost averaging? ›

But, if you invest the same amount of money in a year, there is no difference if you invest $250 a week or $1084 a month.

A 2021 Northwestern Mutual Life study showed that investing a lump sum generally outperforms dollar-cost averaging over various periods of time. Just keep in mind that this is based on past historical performance, so it doesn't necessarily mean this will remain the case in the future.

Even great long-term stocks move down sometimes, and you could begin dollar-cost averaging at these new lower prices and take advantage of that dip. So if you're investing for the long term, don't be afraid to spread out your purchases, even if that means you pay more at certain points down the road.

The data shows lump-sum investing often works in favour of investors. But if you are finding it hard to get back into the market, a DCA strategy can help you take that important first step. It can also provide a smoother investment experience.

Deciding between dollar cost averaging vs buying the dip ultimately hinges on your risk tolerance, investment goals, and engagement level with the market. While DCA provides a steady, lower-risk path, buying the dip offers the potential for greater returns, demanding more attention and risk acceptance.

Dollar cost averaging is investing a fixed amount of money into a particular investment at regular intervals, typically monthly or quarterly. This strategy, with its potential to mitigate timing risk, is most often employed for riskier investments such as stocks and mutual funds (as opposed to bonds or real estate).