Dollar Cost Averaging Calculator
Model a regular investing plan against a lump sum, see the average cost achieved, and understand why buying a fixed amount produces a lower average price than a fixed quantity.
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The arithmetic advantage is real but small
Investing a fixed amount of money on a schedule buys more units when prices are low and fewer when they are high, so the average price paid is always lower than the average price over the period. This is the harmonic mean being below the arithmetic mean, and it is a mathematical certainty rather than a market view. What it is not is a return advantage of any size: the effect is small and it comes with a cost that is much larger.
The cost is time out of the market
Spreading a lump sum over a year leaves the money uninvested for an average of six months. Since markets rise more often than they fall, that costs expected return. Vanguard's widely cited study found immediate investment beat twelve month averaging roughly two thirds of the time, by around two percentage points on average. Dollar cost averaging a lump sum is therefore a decision about regret and behaviour rather than about expected value, which is a perfectly reasonable basis but worth being honest about.
Regular contributions are a different question
None of the above applies to investing salary as it arrives. Money that does not yet exist cannot be invested as a lump sum, so contributing monthly is not a strategy choice at all, it is the only option. That distinction is routinely lost in the argument. The calculator models both cases separately, because comparing a monthly contribution plan to a lump sum you do not have is comparing nothing to nothing.
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Frequently Asked Questions
Is dollar cost averaging better than a lump sum?
On expected return, no. Historical studies find immediate investment wins about two thirds of the time because markets rise more than they fall. Averaging reduces the range of outcomes and the regret of investing just before a fall, which is a behavioural benefit rather than a financial one.
Why is the average cost lower than the average price?
Because a fixed amount buys more units at low prices and fewer at high ones, which weights the average toward the cheaper purchases. This is the harmonic mean and it is always below or equal to the arithmetic mean.
Does this apply to investing my salary each month?
That is not really dollar cost averaging in the strategy sense: the money arrives monthly, so there is no lump sum alternative. Investing it as it arrives is simply the only option, and it is the right one.
How long should I spread a lump sum over?
If you choose to spread it, shorter is better on expected value, with three to six months a common compromise. The longer the period, the more expected return is given up for the reduction in regret.
Does averaging protect me in a falling market?
It reduces the loss on money not yet invested, yes. It does not protect the money already invested, and in a market that falls and stays down, averaging simply means losing money more slowly rather than avoiding the loss.
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How to Use
Enter a contribution amount, frequency, period and expected return to model the outcome.
Disclaimer: This tool is provided "as is" without warranty of any kind. Results are for educational and utility purposes.
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