Using dollar-cost averaging to make scheduled investments

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Using this investment method could be a smart 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
  • This way, you can potentially acquire more shares at a lower average cost than if you buy them all at once
  • Merrill offers automated services to help simplify dollar-cost averaging
  • Our Dollar-Cost Averaging Calculator can help you see how this strategy might work for you
Forming good habits takes discipline and commitment. One way to develop the habit of putting away money regularly is an investment method called 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, this approach can help you pursue your long-term financial goals, like saving and investing for retirement.
A key advantage of this method is that it can help reduce the impact of market volatility by buying more shares when prices are lower and fewer shares when prices are higher. It also frees 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
  • Brenda purchases the same amount of shares each month, at the price-per-share noted above
  • By using dollar-cost averaging, Brenda ends up with 24.4 shares at an average cost of $12.32
  • This makes her "average cost per share" 35 cents lower than the "average price per share" because Brenda's fixed monthly investment buys more shares when prices are lower
An example of dollar-cost averaging
  Amount invested Price per share Shares purchased
April $100 $10 10
May $100 $15 6.7
June $100 $13 7.7
Total $300 $12.67*
*$12.67 is the average price per share
**$12.32 is the average cost per share using dollar-cost averaging

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
  Amount invested Price per share Shares purchased





April $100 $10 10.0
May $300 $100 $15 $15 20 6.7
June $100 $13 7.7
Total $300 $300 $15*
$20 24.4
*$15 and $12.67 are the average prices per share for Andy and Brenda, respectively.
**$15 is the average cost per share for Andy. $12.32 is the average cost per share for Brenda when using dollar-cost averaging.
Through dollar-cost averaging, Brenda was able to buy more shares at a lower cost per share than Andy.
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.

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 account on a fixed schedule of your choosing and then purchasing shares in a mutual fund.
To simplify the process, Merrill offers its Automatic Investment Plan.Footnote 2 This plan automatically invests fixed dollar amounts on a regular basis from the cash available in your Merrill 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 account to make the purchases. You can set up recurring transfers to easily transfer money from any other Merrill Cash Management Account (CMA), Bank of America or other financial institution account on a regular ongoing basis.
Keep in mind, no investment technique is foolproof. However, dollar-cost averaging, coupled with Merrill's Automatic Investment Plan and its funds transfer services could help you put money away to pursue your goals. Plus, over time 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.