Dollar-Cost Averaging into an Index Fund
Invest the same amount on a fixed schedule into a broad index fund, no matter what the market is doing. The simplest strategy, and often the hardest to stick with.
The idea
Instead of trying to guess the "perfect" moment to buy, you invest a fixed amount (for example $200) on a fixed date every month into a diversified fund such as a broad stock market index ETF.
When prices are high, your $200 buys fewer units. When prices are low, it buys more. Over time this smooths out your average purchase price and removes the stress of timing the market.
When it works best
- You have a long time horizon (many years)
- You have regular income and can invest consistently
- You want low effort and low costs
When it fails
- You need the money soon: markets can fall for years
- You stop investing (or sell) during a crash, which locks in losses
- You choose a narrow or expensive fund instead of a broad, low-cost one
Rules
- Choose a broad, low-cost, diversified fund (check the fees: the "expense ratio").
- Pick an amount you can invest every month without needing it back.
- Pick a date (for example the day after payday) and automate it if your broker allows.
- Keep investing through good and bad markets.
- Review once or twice a year, not every day.
Stop loss
There is no stop loss in this strategy. Your risk control is diversification, a long time horizon, and only investing money you won't need soon. Keep an emergency fund separately.
Exit
You exit when you reach your goal (for example retirement), usually gradually rather than all at once.
Example (fictional)
Slav invests $200 every month into the fictional "World Index Fund":
- Month 1: price $50, he buys 4 units
- Month 2: price $40 (the market fell), he buys 5 units
- Month 3: price $50, he buys 4 units
He invested $600 and owns 13 units. His average price is about $46.15, lower than the $50 he would have paid if he had bought everything in month 1. (If prices had only gone up, buying everything at the start would have been cheaper. Dollar-cost averaging doesn't guarantee a better price; it reduces timing risk and stress.)
Pros
- Very simple and low-stress
- Low costs if you choose a low-fee fund
- Removes the temptation to time the market
Cons
- Boring (that's a feature, but people quit)
- Doesn't protect against a long market decline
- Results take years, not weeks
Common mistakes
- Stopping contributions when the market falls
- Checking the account every day and reacting emotionally
- Paying high fees on every purchase
Checklist before investing
- I have an emergency fund separate from this money
- I chose a broad, diversified, low-cost fund
- The amount is affordable every month
- I won't need this money for many years