Some days you have a good workout, some days you have a bad workout, but over time your gains will average out because of the times you keep showing up.
In investing terms, this is called dollar-cost averaging. It's one of the best ways to keep your cool and build the habit as a long-term investor.
What is dollar-cost averaging?
When you dollar-cost average, you start with a lump sum, but instead of investing it all at once, you make regularly scheduled investments of smaller amounts of money into the same asset.
For example, investors who start with $10,000 in the bank and make a weekly $50 investment into Apple are dollar-cost averaging. So are investors who invest $1,000 a month in NVIDIA.
Some people use 'dollar-cost averaging' to refer to smaller investments made over time even when you're not starting with a big chunk of money.
Why would you dollar-cost average?
Dollar-cost averaging helps investors to buffer against bad investing habits, like FOMO, panic selling, and trying to time the market.
This is because it gives you a strategy for building a position in an investment over time, no matter what the market's doing that day.
If you know you've committed to investing $50 a week you're less likely to be concerned if the price of your asset is up or down a little bit compared to last week, because it'll change again next week.
It can also help you build a lower average price. This is because when you invest your money all at once, there's always the chance you've got an asset's high. (On the flipside, dollar-cost averaging may reduce some of the upside if you did happen to time the market's low.)
How much should you dollar-cost average?
Part of dollar-cost averaging is figuring out how much money you want to regularly invest, committing to it, and then reviewing it as your circumstances change.
If you're starting with a lump sum, you may want to split it into equal amounts based on a desired time period.
If you're committing to investing a regular amount from your payslip, you might use a common ratio such as the 50:30:20 rule, where 20% of your income is dedicated to saving and investing.
If a percentage amount feels intimidating, or you're still getting a feel for things, you might feel more comfortable with a smaller dollar amount, like a regular $20 or $50 investment.
The amount you end up choosing will depend on what your goals are.
For example, if you're building wealth toward a house deposit, you might want to keep more of your money in savings.
If you're aggressively trying to reach financial independence, maybe you're more comfortable with investing a higher percentage.
How often should you dollar-cost average?
Weekly, fortnightly, monthly, quarterly - what's the best schedule for dollar-cost averaging?
Vanguard found that, if you have cash to spare, and you want to invest it, you should do so sooner rather than later to give it maximum time in the market to grow.
So splitting it into smaller amounts to deploy it more regularly might make more sense than stretching it out to monthly or quarterly.
Should you dollar-cost average weekly or monthly?
But ultimately, your investment frequency should depend on what you find easiest to manage. If you want to make a weekly investment but get paid infrequently then maybe it's more realistic to aim for a monthly amount.
If you invest more than you can actually afford, you may be more likely to withdraw it or make risky moves to cover any shortfall.
But if you get a regular, steady payslip and often find yourself with cash left over, this might be a good time to develop your investing habit.
Is dollar-cost averaging worth it?
With investing, the best strategy is often the one you can stick to - and if the thought of investing all your money at once makes you nervous, this might mean that dollar-cost averaging is for you.
This is even when Vanguard research has shown that dollar-cost averaging actually isn't the best way to grow your money - the more of your money you can get into the market, the more of a chance it has to grow, they found.
They also noted that this approach doesn't work for everyone, and dollar-cost averaging can stop you freaking out or even abandoning your investment plan when market conditions get rough.
So while dollar-cost averaging works for some people, and lump sum investing works for others - what's pretty much universally agreed is that you should invest your money if you want it to grow - and dollar-cost averaging is a beginner friendly way to do so.
What does it look like in action?
📊 Example: Investing $300 over three months
| Month | Share Price | You Invest | Shares Bought |
|---|---|---|---|
| Month 1 | $5.00 | $100 | 20 shares |
| Month 2 | $4.00 📉 | $100 | 25 shares |
| Month 3 | $5.88 📈 | $100 | 17 shares |
You have $300 and want to invest it over three months by buying $100 of a company's shares each month. In Month 1, the share price is $5, so your $100 buys 20 shares. In Month 2, the market dips to $4. Your $100 now buys 25 shares. In Month 3, the price recovers to $5.88. Your $100 buys 17 shares. By the end, you've invested $300 and own 62 shares at an average price of $4.84. If you'd invested the full $300 in Month 1 at $5, you'd only have 60 shares worth $352.80. With dollar-cost averaging, your 62 shares are worth $364.56 — about 3% more from the same money.
Don't worry - you don't have to do this maths yourself. Your investment app does it for you.
You can also use a formula to work it out, if that's more your jam.
To calculate the average price per share, you can use something called the harmonic mean:
H = n ÷ (1/x₁ + 1/x₂ + 1/x₃ ...)
In plain English: H is your average price per share, n is the number of times you bought in, and x₁, x₂, x₃ are the prices you paid each time.
How to set up dollar-cost averaging in Australia
If you're looking to set up dollar-cost averaging in Australia, most investment apps make it easy. Once you know your budget and timeframe, you can set up automatic investments. Spaceship Voyager investors can set up a weekly, fortnightly or monthly investment in the Spaceship app. One monthly fee covers all your investments, no matter how many you make (though other fees and costs apply).
Ready to start dollar-cost averaging?
Set up an investment plan in the Spaceship app.
Set up an investment planYou're probably already dollar-cost averaging
If you're a working Australian with a super account, then your employer has already been dollar-cost averaging on your behalf. This is because, at least quarterly, 12% of your super should be directed into an account to help fund your retirement. It's a great way to see dollar-cost averaging in action, because you'll likely be automatically making regular payments into it until retirement.
