How dollar cost averaging works
Dollar cost averaging invests a fixed amount at a fixed interval regardless of price. Because the amount is fixed and the price is not, each instalment buys a different quantity: more units when the price is low, fewer when it is high. That happens automatically, with no forecasting and no decision to get wrong.
The consequence is arithmetic rather than strategy. Your average cost per unit ends up below the average of the prices you paid, because the cheaper purchases contributed more units to the total than the expensive ones did. This is the same weighted-average effect that makes a simple mean of prices misleading — here it works in your favour.
What DCA does not do is guarantee a better outcome than investing everything at once. Lump sum wins in a market that rises steadily from your entry point, because the full amount is exposed for longer. DCA wins when prices fall and recover during the accumulation window, and it removes the risk of committing everything immediately before a decline.
Worked example
10,000 invested every month for six months, into an asset whose price fell sharply and then recovered: 50,000, then 40,000, 25,000, 20,000, 32,000 and 45,000.
| Input | Value |
|---|
| Invested per month | 10,000 |
| Total invested (6 months) | 60,000 |
| Average of the six prices | 35,333 |
| Total units acquired | 1.8847 |
| Average cost per unit | 31,835 |
| Position value at 45,000 | 84,813 |
| Return | 41.4% |
The average cost of 31,835 sits about 9.9% below the average price of 35,333 — the fixed instalments bought 0.5 units in the cheapest month against 0.2 in the most expensive. Putting the whole 60,000 in during month one at 50,000 would have bought 1.2 units, worth 54,000 at the end: a 10% loss over the same period. Reverse the price path so it rises steadily instead, and the lump sum wins by the same logic.
How to use this calculator
- Set an amount you can sustain through a long decline — DCA only works if you keep buying when it feels worst.
- Choose an interval and hold it fixed. Weekly and monthly behave similarly; what matters is that the schedule does not depend on your reading of the market.
- Enter the prices at each interval, or a hypothetical path, to see how the average cost forms.
- Compare the average cost against the average price — the gap between them is what the method actually bought you.
- Run the same amount as a lump sum at the first price to see which path the market rewarded, and remember you cannot know that in advance.
Frequently asked questions
Why is my average cost lower than the average price?
Because a fixed amount buys more units at low prices than at high ones, so cheap purchases contribute more weight to the average. This holds whenever prices vary at all — the more volatile the path, the wider the gap. It is arithmetic, not skill.
Is DCA better than investing a lump sum?
Not reliably. A lump sum puts the full amount to work immediately, which wins in a market that rises from your entry. DCA wins when prices fall and recover during accumulation. The genuine advantage of DCA is behavioural: it removes both timing pressure and the temptation to stop.
Does DCA protect me from losses?
No. It spreads your entry price across a range instead of concentrating it on one date, which reduces timing risk. It does nothing about the asset itself — in a market that declines and never recovers, DCA simply means you bought the decline in instalments.
How often should I buy?
The difference between weekly, fortnightly and monthly is small over long horizons. Fees matter more: frequent small purchases on a fixed-fee exchange lose a meaningful share of each instalment. Pick an interval whose fees stay proportionally small, and automate it.
Should I stop DCA when the price drops?
Those are exactly the instalments that produce the low average cost — stopping during a decline removes the mechanism that makes the method work. The question worth asking during a drop is whether your view of the asset has changed, not whether the price has.
Do fees change the calculation much?
They change the average cost directly, since every fee is money spent to acquire units. On percentage-based fees the effect is proportional and modest. On flat fees it is regressive — a fixed charge on a small instalment can consume a noticeable slice of it.
This calculator is an educational tool. Results are estimates based on the inputs you provide and do not constitute financial advice. Verify figures with your bank, broker or a qualified advisor before acting on them.