Dollar-Cost Averaging: Overview and Why It Works

What is Dollar-Cost Averaging?

By Lou Whiteman – Updated Jul 29, 2025 at 11:51 AM

Key Points

Dollar-cost averaging spreads investment over time, reducing risk and emotional stress.
This strategy can help gain more shares by investing in fluctuating markets, even in bear markets.
Consistency in investment intervals is crucial; it prevents timing the market and maintains strategy integrity.

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A visualization showing how dollar-cost averaging works. — Image source: The Motley Fool

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Like with most investment strategies, dollar-cost averaging is not for everyone, and there are times it works better than others. But it can be a powerful tool for removing some of the emotional barriers to investing. Here's a look at how dollar-cost averaging works and the best ways to use the strategy.

When you dollar-cost average, you break your investment into pieces and put a portion of your money into the stock market at equal time intervals instead of putting all of it into the market at once.

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Fractional Shares

Fractional shares are partial ownership units of a stock, allowing investors to buy small amounts, making investment accessible with lower funds.

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Chart and calculations by Matthew Frankel.

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Note that in this example, if you had bought the entire $10,000 stake on day one, you would have only gotten 200 shares. So, by dollar-cost averaging, you were able to buy more shares with your money. Obviously, that's not always the case. If the stock price goes straight up, you would get fewer shares.

You can use this strategy for any investment, whether it's a stock, mutual fund, or exchange-traded fund (ETF). Generally speaking, dollar-cost averaging works best in bear markets and with securities that have dramatic price swings up and down. It is those times, and those types of investments, where reducing investor anxiety and fear of missing out tend to be the most important.

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Exchange-Traded Fund (ETF)

An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at once.

If you do dollar-cost average, beware of hindsight. It is easy to doubt yourself if you spend too much time looking backward. If a stock goes straight up from your starting point, clearly it would have been better to buy as much as possible on day one. Or, taking the FoolishCorp example, it would have been better to buy the full $10,000 in month three. But the whole point of this strategy is we have no way of knowing how a stock is going to move.

If you have a crystal ball, use it. But for the rest of us, dollar-cost averaging is a better strategy than trying to time the market.

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About the Author

Lou Whiteman is a contributing Motley Fool industrials and financial services analyst covering aerospace, defense, transport, manufacturing, specialty finance, and bank stocks. Previously, Lou was a financial analyst and senior writer for TheStreet, a venture capital specialist for The Deal LLC, and a high school personal finance teacher. He holds a bachelor’s degree in communications from Loyola University Maryland and completed a fellowship at the ABA Stonier Graduate School of Banking.

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