If you’ve been thinking about investing but feel overwhelmed by all the strategies out there, you’re not alone. For new investors, the world of stocks, mutual funds, and ETFs can seem complicated. But what if we told you there’s a simple, straightforward way to start building wealth without having to time the market or make complicated trades? It’s called dollar-cost averaging, and it’s one of the easiest methods for long-term investors to dip their toes into the market while potentially reducing risk.

But, like any strategy, dollar-cost averaging has its pros and cons. Before you commit to it, it’s important to fully understand how it works and whether it’s the right choice for your investing goals.

What is Dollar-Cost Averaging (DCA)?

Dollar-cost averaging (DCA) is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions. Instead of trying to buy low and sell high, DCA takes the guesswork out of investing by breaking your investment purchases into smaller, consistent amounts over time.

For example, imagine you decide to invest $200 every month into a mutual fund. Some months, the market might be down, and you’ll end up buying shares at a lower price. Other months, the market might be up, and your $200 will buy fewer shares. Over time, this strategy averages out the cost of your investments, which is where the name “dollar-cost averaging” comes from.

Why Do People Use Dollar-Cost Averaging?

The main appeal of DCA is that it allows you to invest consistently without needing to time the market. Timing the market—trying to predict when stock prices will go up or down—is incredibly difficult, even for experienced professionals. Dollar-cost averaging bypasses that approach by sticking to a steady, disciplined investment plan.

Now that we’ve covered the basics, let's break down the pros and cons of dollar-cost averaging so you can decide if this strategy fits your long-term investment goals.

The Pros of Dollar-Cost Averaging

1. Reduces the Risk of Market Volatility

The stock market is unpredictable, and prices can swing up and down based on a variety of factors. Instead of worrying about whether it’s the “right” time to invest, DCA helps smooth out the highs and lows by spreading your purchases over time.

This means if prices drop, you’re automatically buying more shares at a lower cost. When prices rise, your earlier investments will have already gained value. By averaging out your cost of investments, DCA reduces the impact of market volatility on your portfolio.

2. Encourages Consistent Investing Habits

One of the biggest challenges for new investors is getting started—and sticking with it. Dollar-cost averaging simplifies the process by promoting consistency. You don’t need to make complicated decisions about when to invest or hold large sums of cash waiting for the “perfect moment.”

By setting up automatic contributions—whether that’s weekly, biweekly, or monthly—you’re creating a sustainable habit of investing. Over time, this consistency can lead to significant progress toward your financial goals.

3. Removes Emotional Decision-Making

Investing can be an emotional rollercoaster. When you see stock prices plunge, you might panic and sell, potentially locking in a loss. When prices soar, you might feel tempted to buy at a high point, fearing you’ll miss out.

Dollar-cost averaging eliminates this emotional back-and-forth. Since you’re investing a set amount regardless of market conditions, you don’t have to second-guess yourself. This disciplined approach can help keep your emotions in check and prevent impulsive decisions that could harm your portfolio.

4. Works Well for Long-Term Goals

If you’re investing with the idea of building wealth over years—or even decades—dollar-cost averaging can be an effective strategy. It aligns well with long-term goals, like saving for retirement or a child’s education, because it focuses on gradual, steady growth rather than short-term gains.

Historically, the stock market has trended upward over the long term despite periods of volatility. By consistently investing over time, you’re likely to benefit from this trend, especially if you’re in it for the long haul.

5. Low Barrier to Entry for Beginners

You don’t need a large lump sum to start dollar-cost averaging. Many new investors find it easier to begin with small, manageable contributions, like $50 or $100 a month. Over time, these small amounts can add up to a substantial portfolio thanks to compound growth.

The Cons of Dollar-Cost Averaging

While DCA has many advantages, it’s not without its downsides. Here are some potential drawbacks to consider before committing to this strategy.

1. Potentially Slower Gains in Rising Markets

If the market is consistently trending upward, dollar-cost averaging can result in slower gains compared to investing a lump sum all at once. Why? Because as stock prices rise, the shares you buy later on will cost more, reducing your overall return.

For example, if you have $10,000 to invest and the market is steadily climbing, a lump-sum investment would allow you to capture the full benefit of the market’s upward movement right away. With dollar-cost averaging, you’re investing that $10,000 over time, which means you could miss out on some of those early gains.

2. No Guarantees of Profit

While dollar-cost averaging reduces the risk of volatility, it doesn’t eliminate risk altogether. If the market experiences a prolonged downturn, your investments could lose value—even if you’ve been consistent with your contributions.

It’s important to remember that no investment strategy, including DCA, can guarantee a profit. Diversification and a long-term outlook are crucial for managing risk.

3. Requires Discipline and Patience

Dollar-cost averaging is a long-term strategy, which means it requires patience and discipline. You won’t see immediate returns, and it can be tempting to abandon the approach during periods of market decline.

To stick with DCA, you’ll need to trust in the process and remind yourself that the strategy is designed to work over time—not overnight.

4. May Result in Higher Transaction Costs

If you’re investing in individual stocks or mutual funds through a brokerage that charges transaction fees, dollar-cost averaging could increase your costs. Since you’re making multiple small purchases instead of one large investment, you’ll pay a fee each time you buy, which can add up over time.

Many modern brokerages, however, offer commission-free trading or low-cost index funds, which can help mitigate this drawback. Be sure to verify the fee structure of your brokerage before starting a DCA plan.

Is Dollar-Cost Averaging Right for You?

Dollar-cost averaging is a great option for many new investors, but it’s not ideal for everyone. Here are a few questions to ask yourself before committing to this strategy:

  • Do you have a long-term investment horizon? DCA works best for those who plan to invest consistently over several years.
  • Do you prefer a simple, hands-off approach? If the idea of trying to time the market feels overwhelming, DCA could be a stress-free alternative.
  • Are you working with a smaller budget? Dollar-cost averaging allows you to start investing with smaller amounts, making it accessible to more people.

On the flip side, if you already have a large lump sum to invest and the market is trending upward, you might want to consider alternative strategies to maximize your returns.

Dollar-cost averaging is a tried-and-true strategy for building long-term wealth without the stress of market timing. It encourages consistency, reduces emotional decision-making, and makes investing accessible to beginners.

Like any investment strategy, it’s important to weigh the pros and cons in relation to your own financial situation and goals. Whether you’re saving for retirement, a home, or just building a nest egg, DCA can be a valuable tool in your investment toolkit.