Dollar Cost Averaging

How dollar cost averaging works

You pick an amount, such as $100, and a rhythm, such as monthly. On each date you spend that amount, whatever the price is. At a price of 10 it buys 10 units. At a price of 5 it buys 20. Over time you hold more units from the cheap dates. The method removes the need to pick a day, and it spreads the entry over time.

The arithmetic of the average cost

Take six buys of $100 at the made-up prices 10, 8, 5, 8, 10, 12. The units bought are 100 divided by each price, which add up to 73.33. The total spent is $600. The average cost is total spent divided by total units, $600 / 73.33 = $8.18. The simple average of the six prices is $8.83. The average cost is lower, because the fixed amount buys more of the cheap ones.

This is always true when the amount is fixed, and it is the reason DCA is described as lowering the cost. It says nothing about the price at the end. The DCA calculator does the sum for your own prices.

The lump sum puts all $600 in at the first price. When the price dips and recovers, DCA ends higher, since it bought during the dip. When the price rises steadily the lump sum ends higher, since it was in earlier. When the price falls steadily both lose, and DCA loses less, but neither avoids the loss. Prices and paths are made up and there are no fees.

What dollar cost averaging does and does not do

• It spreads the timing risk. You cannot buy everything at the worst point, and you cannot buy everything at the best one.
• It does not remove market risk. The falling path loses on both methods. If the asset never recovers, a fixed schedule keeps buying it.
• Fees can change the result. Many small buys pay the fee many times. A fixed fee per buy is a larger share of a small buy. See the break-even calculator.
• It does not pick what to buy. An asset that falls to zero stays at zero however regular the buying.

DCA in a trading bot

A DCA bot can mean two things. A time-based bot buys a fixed amount on a schedule, as above. A safety order bot buys more as the price falls, to lower its average cost and to sell at a small gain on the way back. The second adds size into a fall, so it is closer to averaging down, and a long fall can use up the whole account before it recovers. See DCA bot and the average down calculator.

Choosing the amount and the schedule

Two settings decide how DCA behaves: how much each buy is, and how often. A smaller buy more often smooths more but pays more in fees. A larger buy less often is closer to a lump sum. Neither setting changes the rule above, that a fixed amount buys more units when the price is low. What they change is how much of your money is exposed at each point, which is the thing a bot's size settings control as well. Decide the total you are willing to put at risk first, then split it, rather than letting a schedule decide the total by running on without end.

What this page does not tell you

It does not say that any asset will recover, or that regular buying is right for you. It shows the arithmetic of the average cost and three made-up paths. Taxes, fees and the right choice of asset vary and are outside it.