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Dollar Cost Averaging Calculator
Calculate how regular investments can reduce risk and grow your wealth over time
Total Invested
Final Portfolio Value
Total Earnings
Average Annual Return
Dollar Cost Averaging (DCA) involves investing a fixed amount of money at regular intervals, regardless of the asset price. The future value of a DCA strategy can be calculated using the future value of an annuity formula.
Where:
- FV = Future Value
- P = Initial Investment
- r = Rate of return per period
- n = Number of periods
- PMT = Regular investment amount per period
The average cost per share is calculated as:
Example Calculation
Let’s say you start with an initial investment of $1,000 and invest $500 monthly for 10 years, with an expected annual return of 8%, annual volatility of 15%, and an inflation rate of 2.5%:
Initial Investment (P) = $1,000
Monthly Investment (PMT) = $500
Annual Return = 8% or 0.08
Monthly Return = 0.08 / 12 = 0.00667
Investment Duration = 10 years
Number of Periods = 10 × 12 = 120 months
Calculate the future value of the initial investment:
FVinitial = $1,000 × (1 + 0.00667)120 = $1,000 × 2.2196 = $2,219.60
Calculate the future value of the regular investments:
FVregular = $500 × [((1 + 0.00667)120 – 1) / 0.00667]
FVregular = $500 × [(2.2196 – 1) / 0.00667] = $500 × [1.2196 / 0.00667] = $500 × 182.86 = $91,430
Total Future Value = $2,219.60 + $91,430 = $93,649.60
Total Amount Invested = $1,000 + ($500 × 120) = $1,000 + $60,000 = $61,000
Total Earnings = $93,649.60 – $61,000 = $32,649.60
Average Annual Return (after inflation) = [(1 + 0.08) / (1 + 0.025)] – 1 = 0.0537 or 5.37%
After 10 years, your DCA strategy would result in a portfolio value of approximately $93,650, with total earnings of $32,650 and an average annual return of 5.37% after inflation.
Dollar Cost Averaging vs. Lump Sum Investing
Dollar Cost Averaging (DCA) and lump sum investing are two different approaches to investing:
- Dollar Cost Averaging: Investing a fixed amount at regular intervals. This approach reduces the risk of investing a large amount at a market peak and helps smooth out the effects of market volatility.
- Lump Sum Investing: Investing a large amount all at once. Historically, this approach has outperformed DCA about two-thirds of the time because markets tend to trend upward over the long term.
While lump sum investing has historically provided higher returns on average, DCA offers significant psychological benefits by reducing the risk of regret and helping investors stay disciplined during market downturns.
Understanding Dollar Cost Averaging
What is Dollar Cost Averaging?
Dollar Cost Averaging (DCA) is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of the asset’s price. This approach helps reduce the impact of volatility by spreading out your investments over time.
How It Works
With DCA, you invest the same amount of money regularly. When prices are high, you buy fewer shares. When prices are low, you buy more shares. This results in a lower average cost per share over time compared to investing a lump sum.
Risk Reduction
DCA helps reduce the risk of market timing. By investing consistently over time, you avoid the risk of investing a large amount at a market peak. This strategy can provide peace of mind during volatile market periods.
Psychological Benefits
DCA offers significant psychological advantages. It helps investors stay disciplined during market downturns and reduces the emotional stress of trying to time the market. This consistency can lead to better long-term investment outcomes.
Limitations
While DCA reduces risk, it may result in lower returns compared to lump sum investing in rising markets. It also requires discipline to maintain the investment schedule regardless of market conditions. Transaction costs may also be higher due to frequent trades.
Who Should Use DCA?
DCA is particularly suitable for beginners, investors with a lower risk tolerance, and those who want to invest a large sum but are concerned about market timing. It’s also ideal for regular income earners who can invest a portion of their salary consistently.