Investing a little every month

A little every month

Instead of putting in a big pile of money once, you put in the same amount every month, no matter what the price is. That's called dollar cost averaging, or DCA.

Watch it work

You put $100 into a fund every month. The price bounces around:

• January: price $10, you get 10 shares.
• February: price $8, you get 12.5 shares.
• March: price $5, you get 20 shares.
• April: price $8, you get 12.5 shares.
• May: price $10, you get 10 shares.

(Many brokers let you buy a fractional share, like half a share.)

You put in $500 and got 65 shares. Your average cost is $500 ÷ 65, about $7.69 a share, even though the average price over those months was $8.20. Why? Because the same $100 bought more shares when the price was low.

In May the price is back to $10, so your 65 shares are worth $650. The scary drop in March actually helped you.

Why timing the market is hard

Timing the market means trying to buy right before prices rise and sell right before they fall. It sounds easy. It isn't.

• The best days often come right after the worst days, when people are most scared.
• Studies of the US market over 20-year stretches found that missing just the 10 best days cut the final amount roughly in half.
• To time the market, you have to be right twice: when to get out and when to get back in.

DCA skips all the guessing.

Small amounts, long time

Put in $100 a month for 30 years with a steady 7% a year of growth. (We use 7% because it's close to the long-run average for US stocks after inflation.) You put in $36,000. It grows to about $122,000. Most of the final pile is growth, not money you put in. That's compound growth doing the heavy lifting.

Real markets don't grow a smooth 7% every year. Some years are way up, some are way down, and the past doesn't promise the future.

The honest fine print

• If you already have a big pile of money, history says putting it all in at once (a lump sum) did better about two out of three times, because markets went up more often than down. DCA wins when prices fall after you start. Many people still pick DCA because it feels easier and lowers regret.
• For most people, it isn't really a choice. Money arrives a little at a time, with each paycheck (or allowance). Investing it as it comes is DCA.
• DCA doesn't stop losses. If the thing you buy keeps going down forever, buying more each month just loses more. That's why DCA is usually paired with broad index funds, not one risky stock.

Remember

• DCA means the same amount, every month, at any price.
• You automatically buy more shares when prices are low.
• Timing the market is hard, and missing a few of the best days hurts a lot.
• DCA works best with broad, diversified funds and lots of time.