Dollar-Cost Averaging Investing – The Definitive Guide

Our guide outlines how dollar-cost averaging works, its pros and cons, what type of investments work best and must-know facts

Updated 7 June 2024

“Dollar-cost averaging” sounds complicated, but you don’t have to be an economist to understand it. It’s a simple system of investing that anyone can adopt. Additionally, its primary benefit is to take the guesswork and emotion out of investing and portfolio management.

In this guide, we outline:

What Is Dollar-Cost Averaging Investing?

The principle of dollar-cost averaging (DCA) is simple--you invest the same amount of money in a given investment, at set intervals. Dollar-cost averaging is a popular, time-tested system of investing and remains the most popular investing system for New Zealanders.

How regular does dollar-cost averaging investing need to be?

It's completely flexible. It could be a fixed dollar amount monthly or quarterly, or it could be a set percentage of each salary payment, much like how KiwiSaver works. The defining characteristic is that you invest a consistent amount into one vehicle, like clockwork.
For example, you could invest $500 every month, or 10% of what you receive each payday. If your monthly after-tax salary is $5,000, you would be investing $500 from each payday. If you get a pay rise and your monthly after-tax salary becomes $6,000, you would invest $600.
Besides the consistent investment amount, another key feature of dollar-cost averaging is that you buy more and more of the same security, establishing a larger and larger position over time.
You might invest $200 every month, but if you buy shares in A2 Milk one month and shares of Fletcher Building the next month, that is not dollar-cost averaging. If you buy shares of A2 Milk and Fletcher Building both months, and every month thereafter, that is dollar-cost averaging.
As simple as dollar-cost averaging may be, it has some powerful implications in that it shields you from swings in the prices of investments like shares, funds and ETFs.

As an example:

You decide to buy shares on a dollar-cost average basis. If the share value decreases, your next dollar-cost averaging trade will buy you more shares.
If the value of the share increases, your next dollar-cost averaging trade will buy you fewer, but more valuable shares.
Over time, this insulates you from the negative effects of price swings. It also eliminates the risks inherent in trying to “time” the market and buy low.

MoneyHub founder Christopher Walsh shares his experience:
“I joined a managed fund early in 2020, but there was a delay reconciling the money after I’d transferred six weekly payments. During these six weeks, the international equity markets kept rising, and the fund went up in value around 10%. Sadly, my balance was $0. The money finally arrived in one hit, and the week after, the markets fell, dragging my freshly arrived balance down with it. Had the money arrived progressively in the fund (and on time) the dollar-cost averaging would have protected my total investment a lot better”.

Does Dollar-Cost Averaging Work?

For those who value a consistent, conservative approach to investing, dollar-cost averaging works incredibly well. In fact, it’s the strategy used by Warren Buffet, arguably the greatest living securities trader.

Here’s an example of how it works. Let’s say you want to invest $300 per month in a particular share. The share prices on the month of investing are:

January: $25
February: $30
March: $20
April: $25
May: $30
June: $25

How dollar-cost averaging lowers the average cost of an investment:

If you scrupulously invest your $300 every month, regardless of how the share price moves, at the end of those six months you have a 71-share position. Your effective acquisition price is the average of all of these six prices—in other words, $25.83 per share.
That’s not as good as if you had acquired the whole 71-share position in March, but it’s slightly better than you would have done acquiring the same position in January, April, or June, and much better than if you had acquired the whole position in February or May.
Of course, there are no guarantees in investing, but this example illustrates how, with sound share selection, investors can come out ahead using dollar-cost averaging.

Dollar-Cost Averaging – Pros and Cons

Pros:

Insulates you from market volatility – as you increase your holdings month after month, price fluctuations are less detrimental to your overall return on investment. You also get upside in the good performing months which, if it’s the right investment, offset future bad performing months.
Systematizes your investment – if you can commit to invest, for example, $500 per month, you can plan your budget and personal finances around that.
Allows you to invest without emotion – there’s no decision-making process; you invest a fixed, agreed-upon amount and ‘set and forget’.
Builds up a sizable position – regular investing in profitable securities leads to wealth creation even as markets go up and down.

Cons:

Limited returns – you won’t experience huge peaks with dollar-cost averaging. For example, if a share you regularly invest in is significantly undervalued, it may be more profitable to buy $5,000 worth of shares in one go. This will create more wealth than monthly $200 investments if the share price keeps increasing.
Upward-trending shares become more expensive over time – for example, investing $200 a month in a share which goes from $1 to $15 over two years reaches a point where your ongoing contributions buy less and less shares.

What Investments Can You Buy with Dollar-Cost Averaging?

Almost any equity or instrument that is traded as shares can be traded using a dollar-cost averaging strategy. Examples include:

Shares are an obvious choice. Many time-tested blue-chip and mid-cap shares fall within the price range of almost any dollar-cost averaging strategy. Best of all, investing platforms let you dollar-cost average automatically by setting up ongoing payments for specific shares. Examples include Sharesies, Hatch and Tiger Brokers (NZ).

Real estate investment trusts (REITs)

REITs are shares of an aggregated portfolio of real estate holdings. Shares of publicly-traded REITs are a great way to invest in property markets with some protection against volatility. Again, these can be purchases made on the share market, with property companies such as Kiwi Property Group, Goodman Property Trust and Precinct Properties being well-known REIT examples. Sharesies makes it possible to dollar-cost average your investment at low transaction costs by setting up regular contributions.

Exchange-traded Funds (ETFs)

ETFs are publicly-traded, curated portfolios of shares, and other investment vehicles. As our guide to ETFs explains, they are like a “done-for-you diversified portfolio.” ETFs exist to service various risk profiles and often track an underlying index, like the NZX 50 in New Zealand or the S&P 500 in the US.

Buying shares of an ETF with a dollar-cost averaging strategy is an easy way to create a diversified portfolio with a growing position, just as you can with shares.

Managed Funds

Another variety of “done-for-you diversified portfolio,” managed funds contain a collection of securities, with active funds chasing market-beating returns and index funds tracking an index like the NZX50. The difference is that ETFs are traded on share markets such as the NZX, whereas managed funds are not. A platform like InvestNow lets you make regular contributions in one of the dozens of managed funds on offer.

Commodities

While it’s unlikely there’s a lot of investors trading in commodity futures contracts such as wheat, meat, oil, and precious metals, such investments are subject to significant volatility. For this reason, building up positions with dollar-cost averaging can lower the overall risk of a loss.

Should I Buy Bonds with Dollar-Cost Averaging?

Bonds are not good candidates for dollar-cost averaging for the following reasons:

Less Volatility: One of the key advantages is the protection dollar-cost averaging provides you from volatility. Most bonds are less volatile than shares, commodities, and other vehicles. The less volatility, the less relevant dollar-cost averaging becomes.
Higher Share Price: Individual bonds often have a minimum investment which could be outside a typical New Zealand investor's dollar-cost budget.
Short Term: Dollar-cost averaging depends on building a larger and larger position over time. Bonds have a maturity date, after which the position will be liquidated. Yes, you get your money back with interest, but now you need to find another vehicle to invest that cash in.

For more information, our Investing in Bonds guide outlines everything you need to know.

Dollar-Cost Averaging Frequently Asked Questions

To help you understand more about the next steps, we've answered commonly asked questions in detail below.

Who Should Use Dollar-Cost Averaging?

Generally, dollar-cost averaging is an effective investment strategy for risk-averse, conservative investors with long time-horizons who want to harness the growth potential of the sharemarket effectively. It is a popular strategy for employees to use to save for retirement, especially with an early start.

How Can I Get Started with Dollar-Cost Averaging Investing?

Investment platforms such as Hatch, Sharesies and InvestNow offer easy-to-manage auto-investing, which helps you achieve dollar-cost averaging on whatever you decide to invest in.

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