Wondering what dollar-cost averaging is and if it’s the right strategy for you? This is a question many new and seasoned investors ask when looking for ways to grow their money with minimal risk. By investing consistently over time with this strategy, you can reduce the impact of market ups and downs while focusing on long-term growth. Here’s what you need to know about dollar-cost averaging.
What is dollar-cost averaging?
Dollar-cost averaging is an investing strategy that involves contributing a fixed amount to a fund or stock portfolio at regular time intervals, regardless of stock prices or market movements at any given time.
When the prices of your chosen stocks or funds go up, your fixed investment will buy fewer shares. When prices go down, it nets you more shares and reduces your average cost per share over time.
Often used with index funds like the S&P 500 or the Nasdaq Composite, this strategy reduces the impact of market volatility and removes the need to time your purchases perfectly.
Dollar-cost averaging example
Let’s say you decide to invest $1,000 in stock ABC on the first of every month for five months. Assume the following table indicates how the price of the stock moves in the first five months.
Month
ABC stock price
Shares purchased
Shares owned
Value of investment
January
$20
50
50
$1,000
February
$18
55.55
105.55
$1,899.90
March
$21
47.62
153.17
$3,216.57
April
$19
52.63
205.8
$3,910.20
May
$22
45.45
251.25
$5,527.50
By May, a total investment of $5,000 ($1,000 X 5 months) is worth $5,527.50. Had you decided to invest that total at any one of those months, your investment might have ended up higher or lower.
In this case, the average price of the stock was $19.90 per share (total amount invested / total number of shares owned = average price per share), which is almost the same as the original purchase price, but it’s lower than the stock’s highest price.
By using a dollar-cost averaging strategy, you reduced the impact of volatility in the stock price over time.
How to use dollar-cost averaging
One of the easiest ways to apply the dollar-cost averaging strategy is by setting up automatic contributions to a tax-free savings account (TFSA) or registered retirement savings plan (RRSP). Then, you can use the money to buy ETFs, index funds or individual stocks on a consistent schedule. Any growth in a TFSA is tax-free, while RRSP earnings are tax-deferred.
You can also use a stock trading account. Many brokerages, like Questrade or Qtrade Direct Investing, offer commission-free trades for stocks and ETFs, making it easier for you to get started. You can even set up automatic monthly investments, so you don’t forget.
Our selection of top picks is based on the same criteria as our annual Stock Trading Platform Awards. This is updated yearly to reflect changes in the market.
"Best for" picks are those we've evaluated to be best for specific product features or categories – you can read our full methodology here. If we show a "Promoted" pick, it's been chosen from among our commercial partners and is based on factors that include special features or offers, and the commission we receive.
This isn't an exhaustive list of all the trading platforms out there. What's best for you depends on your own investing strategy, budget and financial goals.
How often should you invest with dollar-cost averaging?
The frequency of your investments depends on your budget, goals and the account you’re using.
Monthly contributions are popular because they align with paydays and are easy to automate.
Weekly or biweekly contributions can work well if you want to invest smaller amounts more frequently, potentially capturing more short-term market dips.
Quarterly contributions are less common but may suit investors who prefer larger lump sums.
Benefits of dollar-cost averaging
Investors use dollar-cost averaging as it has plenty of advantages, including:
Reduces the impact of market volatility. By investing a fixed amount regularly, you buy more shares when prices are low and fewer when prices are high, smoothing out the effects of short-term market swings.
Removes the need to time the market. Dollar-cost averaging takes the guesswork out of investing. You don’t have to predict market highs or lows, and you can focus on steadily building your portfolio without stress over market swings.
Encourages disciplined investing. Regularly contributing to your investments builds good financial habits and helps you stay focused on long-term goals rather than reacting emotionally to market movements.
Makes investing more accessible. You can start with small amounts, even $50–$100 per month, making it easier for beginners or those without a large lump sum to begin investing.
Risks of dollar-cost averaging
While there are plenty of benefits of dollar-cost averaging, there are some risks as well, such as:
Lower returns in a rising market. If the market steadily trends upward, lump-sum investing at the start could yield higher returns than dollar-cost averaging.
Discipline required. Dollar-cost averaging only works if you consistently invest on schedule. Missing contributions or stopping during market dips can reduce the strategy’s effectiveness.
Limited protection against long-term declines. While dollar-cost averaging helps smooth short-term volatility, it doesn’t protect you from prolonged market downturns or poorly performing investments.
Transaction fees and costs. If your brokerage charges fees per trade, frequent small purchases could eat into your returns. Low-cost or commission-free platforms can help mitigate this risk.
Automatic investing plans
Many brokers provide automatic investing plans. These strategies allow you to contribute fixed amounts of money automatically from your bank account to securities such as a mutual fund at set time intervals. Here are some popular picks.
0.05% - 0.37% for regular portfolios and 0.20% - 0.60% for SRI portfolios
Rounds up your purchases to the nearest dollar and invests the change in ETFs
Justwealth robo-advisor
$5,000 (no minimum for RESP accounts)
$4.99 account fee
0.5% management fee for the first $500,000
0.4% for amounts over $500,000
Low management expense ratio
Before you kick off your dollar-cost averaging strategy, you’ll need to open a stock trading account with a broker. Here are some of your choices.
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Automate your contributions. Set up automatic investments through your TFSA, RRSP or brokerage account to ensure consistency and remove the temptation to skip contributions.
Choose low-cost investments. Use ETFs, index funds or commission-free trades to minimize fees, which can lower your return when investing frequently.
Stay consistent during market swings. Don’t stop investing when the market drops. Dollar-cost averaging works best when you remain disciplined through ups and downs.
Look for quality investments. Take time to research and select your stocks, ETFs or funds carefully and review your portfolio periodically to make adjustments as needed.
Bottom line
Dollar-cost averaging is the process of dividing your total investment in a stock or fund into fixed investments at set time intervals. When done correctly, this strategy can help hedge against volatility and earn strong profits in the long run. Before you invest, compare stock-trading platforms to find one that’s right for you.
Frequently asked questions about dollar-cost averaging
Dollar-cost averaging helps reduce the impact of short-term market volatility, but it cannot fully protect you from major market declines. It's most effective as part of a long-term investing strategy, and combining it with diversified investments can further mitigate risk.
Yes, cryptocurrencies are highly volatile, so using dollar-cost averaging allows you to invest smaller amounts regularly, reducing the risk of buying at the wrong time. Compare some of the best crypto exchanges in Canada to get started.
DRIPs and dollar-cost averaging are different investing strategies, but they can work together. Dollar-cost averaging involves investing a fixed amount regularly to reduce the impact of market volatility, while DRIPs automatically reinvest any dividends you earn to buy more shares. Using both allows your contributions to grow steadily over time while your dividends compound, maximizing long-term growth.
Sources
Important information: Powered by Finder.com. This information is general in nature and is no substitute for professional advice. It does not take into account your personal situation. This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for most investors. You do not own or have any interest in the underlying asset. Capital is at risk, including the risk of losing more than the amount originally put in, market volatility and liquidity risks. Past performance is no guarantee of future results. Tax on profits may apply. Consider the Product Disclosure Statement and Target Market Determination for the product on the provider's website. Consider your own circumstances, including whether you can afford to take the high risk of losing your money and possess the relevant experience and knowledge. We recommend that you obtain independent advice from a suitably licensed financial advisor before making any trades.
Sheri Bechtel is associate editorial director of product reviews at The Balance and a former editor at Finder, specializing in investments. Her writing and analysis has been featured in Yahoo News, Bond Buyer and Prospect News. She holds a B.A. in English from Columbus State University.
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Stacie Hurst is an editor at Finder, specializing in loans, banking, investing and money transfers. She has a Bachelor of Arts in Psychology and Writing, and she has completed FP Canada Institute's Financial Management Course. Before working in the publishing industry, Stacie completed one year of law school in the United States. When not working, she can usually be found watching K-dramas or playing games with her friends and family.
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