Using dollar-cost averaging to make scheduled investments

Text size: aA aA aA
How you can use dollar-cost averaging to make scheduled investments
A tool like dollar-cost averaging, when automated, is a way to steadily pursue your goals while potentially saving you time and money.

Key points

  • Dollar-cost averaging can help you build up your portfolio by investing small amounts on a regular basis, usually in mutual funds
  • You can potentially acquire more shares at a lower average cost than if you buy them all at once
  • Merrill Edge® offers automated services to help simplify dollar-cost averaging
  • Use our Use our Dollar-Cost Averaging Calculator
Forming good habits takes discipline and commitment. One way to develop the habit of putting away money regularly is an investment method called Learn more about dollar-cost averaging.Footnote 1 Using this method means setting up investment purchases, usually with mutual funds or index funds, of a fixed amount over time. As part of your regular budget, they can help you pursue your long-term financial goals, like saving and investing for retirement.
If you're unfamiliar with dollar-cost averaging, it's a method that can help reduce the impact of volatility by buying more shares when prices are lower and fewer shares when prices are higher. It spares you from having to decide when to buy. Over time, this tends to reduce the average cost of all the shares you buy — which may improve your long-term investment results.

How dollar-cost averaging works

Assume an investor, Brenda, wants to invest $100 a month from her pay. As shown in the table below:
  • The price of one mutual fund share is $10 in April, $15 in May and $13 in June — for an average price of $12.67
  • Brenda purchases the shares while the price fluctuates from month to month
  • Brenda ends up with 24.4 shares at an average cost of $12.32
  • Her "average cost per share" is 35 cents lower than the "average price per share" because Brenda's fixed monthly investment buys more shares when prices are lower
Example of dollar-cost averaging investment strategy

How dollar-cost averaging stacks up to lump-sum investing

To see how investing your money at regular intervals over time compares with investing the same amount all at once in a single lump-sum, consider this example:
  • Andy invests $300 in May, when the shares cost $15, and purchases a total of 20 shares
  • Brenda invests $300 using dollar-cost averaging over three months, and purchases a total of 24.4 shares at an average cost of $12.32
Even though Andy and Brenda each invested $300, Brenda ended up with 22% more shares at an 18% lower average cost per share than Andy.
Dollar-cost averaging vs. lump-sum investing
If Andy or Brenda had bought all the shares in April at $10 per share, his or her total cost per share, of course, would have been less than the average cost per share over a three-month period. However, dollar-cost averaging spares you from having to choose the ideal time to buy and makes it easy to invest small amounts by providing a convenient way to help you pursue your financial goals over time.
Dollar-cost averaging buys more shares when prices are lower and fewer shares when prices are higher.

How to implement dollar-cost averaging

One way to use dollar-cost averaging is by manually moving your cash from your bank account into your Merrill Edge account on a fixed schedule of your choosing and then purchasing shares in a mutual fund.
To simplify the process, Merrill Edge offers its To simplify contributions for a dollar cost averaging program, use our Automatic Investment Plan.Footnote 2 This plan automatically invests fixed dollar amounts on a regular basis from the cash available in your Merrill Edge investment account. You decide on the frequency, dollar amount and mutual fund to purchase ongoing.
Of course, you need to ensure there is sufficient cash in your Merrill Edge account to make the purchases. Set up recurring transfers to easily transfer money from any other Merrill Edge CMA, Bank of America or other financial institution account on a regular ongoing basis.
No investment technique is foolproof. However, dollar-cost averaging, coupled with Merrill Edge's Automatic Investment Plan and its funds transfer services could help you put money away to pursue your goals. Plus, it could potentially reduce the average cost of the shares you buy — which may improve your long-term investment results.
Next steps

Footnote 1 A periodic investment plan such as dollar-cost averaging does not ensure a profit or protect against a loss in declining markets. Such a plan involves continuous investment in securities regardless of fluctuating price levels; investors should carefully consider their financial ability to continue their purchases through periods of fluctuating price levels.

Footnote 2 No investment plan is risk free, and a systematic investment plan does not ensure profits or protect against losses in declining markets. This program is recommended for long-term investing in mutual funds. Since Automatic Investment Plans (AIPs) involve continual investment in securities regardless of fluctuating prices, you should consider your financial ability to continue investing through periods of low price levels.

Your AIP purchases may be on margin. Borrowing on margin and using securities as collateral involves certain risks. Margin is not appropriate for all investors. Please refer to your Margin Agreement, which outlines the risks associated with borrowing on margin.