What to know about dollar-cost averaging, an investing strategy to consider during market volatility (2024)

If you're already contributing money to a 401(k) retirement account, you may not have realized it, but you're practicing a popular investment strategy known as dollar-cost averaging.

Simply put, this approach means you're investing fixed, equal amounts on a regular basis, say monthly or bi-weekly, rather than investing one lump sum of cash all at once.

With a defined 401(k) contribution plan, for example, you're investing as you earn, regularly taking money from each paycheck throughout the year and putting it into the market. Dollar-cost averaging could also look like if you decide to invest $5,000 of your savings by splitting that cash into five parts, where $1,000 is invested each month for five months.

Subscribe to the Select Newsletter!

Our best selections in your inbox. Shopping recommendations that help upgrade your life, delivered weekly.Sign-up here.

Here's what to know about dollar-cost averaging

Dollar-cost averaging allows you to spread out your investments and buy into the market at different times at varying prices. In turn, these purchase prices ideally balance each other out, which is where the "averaging" part of the phrase comes from.

Experts often recommend this long-term investing approach (especially with broad market-tracking index funds) to people with low-risk appetites since contributing cash consistently over time reduces the impact of any market volatility on an investment. Not to mention, it allows investors to forget about the up and down movements of the market since their contributions aren't influenced by what's happening; they're making contributions at regular intervals no matter what. This helps leave emotion-based investing off the table.

Dollar-cost averaging vs. lump-sum investing

Dollar-cost averaging is often compared with its antithesis, lump-sum investing, an opposite approach otherwise known as simply timing the market.

Like dollar-cost averaging, lump-sum investing can also help you build wealth — and even better, maximize your returns — albeit with the caveat that you're taking on much more risk. After all, as we all know, no one can really time the market.

When investing a big wad of cash into the market all at once, your money gets put to work immediately. With dollar-cost averaging, however, only some of your money goes into the market to start and the rest is set aside for future contributions — this could allow you to catch future dips in the market, but your immediate gains may be smaller if the market takes off sooner than expected.

Is dollar-cost averaging right for you?

When investing with any method or strategy, the first step is to identify the potential returns as well as your risk tolerance.

Though you may get better returns over time with lump-sum investing, it's not a good idea for those looking to lower their short-term downside risk since the potential for loss is greater.

Risk-averse investors, or those worried about market volatility, are better off using the dollar-cost averaging investment approach. A good place to start is with an S&P 500 index fund which has shown an average annualized return of approximately 10% since 1957.

For example,Charles Schwab'sS&P 500 Index Fund is a straightforward option with no investment minimum. Its expense ratio is 0.02%, meaning every $10,000 invested costs $2 annually — index funds generally have a 0.2% expense ratio, so this is notably low.

Charles Schwab

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One®Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit

  • Fees

    Fees may vary depending on the investment vehicle selected. Schwab One®Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract

  • Bonus


  • Investment vehicles

    Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One®Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account

  • Investment options

    Stocks, bonds, mutual funds, CDs and ETFs

  • Educational resources

    Extensive retirement planning tools

Terms apply.

For an option with no expense ratio, consider the Fidelity ZERO®Large Cap Index Fund. Though the fund doesn't technically track the S&P 500, the Fidelity U.S. Large Cap Index tracks large capitalization stocks, whichthe website says, "are considered to be stocks of the largest 500 U.S. companies."

Fidelity Investments

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go®account, but minimum $10 balance according to the investment strategy chosen

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)

  • Bonus

    Find special offers here

  • Investment vehicles

    Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other:Fidelity Investments 529 College Savings; Fidelity HSA®

  • Investment options

    Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

  • Educational resources

    Extensive tools and industry-leading, in-depth research from 20-plus independent providers

Terms apply.

You can also consider investing a fixed monthly amount through a robo-advisor like Betterment, which will create a custom portfolio of ETFs (which are similar to index funds) for you based on your risk tolerance and investing horizon.


  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn't require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.

  • Fees

    Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash

  • Educational resources

    Betterment offers retirement and other education materials

Terms apply. Does not apply to crypto asset portfolios.

Catch up on Select's in-depth coverage ofpersonal finance,tech and tools,wellnessand more, and follow us onFacebook,InstagramandTwitterto stay up to date.

Read more

Getting your money right: How to diversify an investment portfolio to reduce risk and losses

When saving for retirement, seniors overestimate market volatility and underestimate life expectancy

Everyone's talking about 'stagflation:' What is it and should you be worried?

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

As a seasoned financial expert with a comprehensive understanding of investment strategies, particularly dollar-cost averaging, let me delve into the intricacies of the concepts mentioned in the article.

Dollar-cost averaging (DCA) is a widely acclaimed investment strategy, and its efficacy lies in its systematic approach to investing fixed, equal amounts at regular intervals, such as monthly or bi-weekly. The key premise is to spread out investments over time, mitigating the impact of market volatility. Here's a breakdown of the concepts touched upon in the article:

  1. Dollar-Cost Averaging (DCA): This strategy involves consistently investing fixed amounts of money at regular intervals, irrespective of market conditions. The idea is to reduce the impact of short-term market fluctuations on the overall investment.

  2. Defined Contribution Plans (e.g., 401(k)): The article specifically mentions 401(k) plans, which are employer-sponsored retirement plans where employees contribute a portion of their salary, often with the employer matching a percentage. In this context, DCA is applied as contributions are regularly made from each paycheck.

  3. Market Timing vs. Lump-Sum Investing: The article compares DCA with lump-sum investing, emphasizing that market timing is challenging. Lump-sum investing involves putting a large amount of money into the market all at once, potentially maximizing returns but also carrying higher risk.

  4. Risk Tolerance: Investors are advised to assess their risk tolerance before choosing between DCA and lump-sum investing. DCA is often recommended for risk-averse individuals who prefer a more stable, long-term approach to investing.

  5. S&P 500 Index Fund: The article suggests using an S&P 500 index fund for DCA, citing its historical average annualized return since 1957. It mentions Charles Schwab's S&P 500 Index Fund as an example with low expenses.

  6. Expense Ratio: The expense ratio is the annual fee investors pay for owning a fund. The article highlights the low expense ratio of Charles Schwab's S&P 500 Index Fund (0.02%) and introduces Fidelity's ZERO® Large Cap Index Fund with a zero expense ratio.

  7. Robo-Advisors (e.g., Betterment): The article suggests using robo-advisors like Betterment for DCA, where automated algorithms create customized portfolios based on an investor's risk tolerance and goals.

  8. Investment Vehicles: The article discusses various investment vehicles, including index funds, ETFs, mutual funds, and robo-advisors. It provides information on Charles Schwab, Fidelity, and Betterment as examples.

  9. Minimum Deposit and Balance Requirements: Different investment vehicles may have varying minimum deposit and balance requirements, such as Charles Schwab's $5,000 minimum deposit for automated investing through Schwab Intelligent Portfolios.

  10. Educational Resources: The mentioned financial institutions offer extensive educational resources, including retirement planning tools, research, and materials to guide investors in making informed decisions.

In conclusion, the article underscores the importance of aligning investment strategies with individual risk tolerance and goals, providing a comprehensive overview of dollar-cost averaging as a viable approach for long-term investors.

What to know about dollar-cost averaging, an investing strategy to consider during market volatility (2024)


Top Articles
Latest Posts
Article information

Author: Msgr. Benton Quitzon

Last Updated:

Views: 5951

Rating: 4.2 / 5 (43 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Msgr. Benton Quitzon

Birthday: 2001-08-13

Address: 96487 Kris Cliff, Teresiafurt, WI 95201

Phone: +9418513585781

Job: Senior Designer

Hobby: Calligraphy, Rowing, Vacation, Geocaching, Web surfing, Electronics, Electronics

Introduction: My name is Msgr. Benton Quitzon, I am a comfortable, charming, thankful, happy, adventurous, handsome, precious person who loves writing and wants to share my knowledge and understanding with you.