Dollar-Cost Averaging, explained.
Dollar-cost averaging invests a fixed monetary amount at regular intervals. Lower prices buy more units and higher prices buy fewer, changing the average cost per unit.
Why it happens
A staged purchase leaves part of an existing cash pot uninvested until later. This can help on a falling path and reduce participation on a rising path. Investing new income as it arrives is a different cash-availability problem.
Dollar-cost averaging invests a fixed monetary amount at regular intervals, purchasing more units at lower prices and fewer at higher prices.
Read the result
Advance six equal purchases and read both fractional shares and remaining cash. Compare rising, falling, and recovery scenarios. Staged wealth includes uninvested cash, so neither strategy gets an artificial advantage from ignoring part of its starting resources.
A worked example
Two equal purchases at different prices
A staged buyer invests 100 tokens at a price of twenty and receives five shares.
Another 100 at a price of ten buys ten more shares, giving fifteen shares for 200 tokens.
Average cost is 200/15, about 13.33, not the arithmetic average price of fifteen. Whether this beats an available lump sum still depends on the complete path.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
Six periods each invest 100 tokens. Fractional units are allowed. The lump-sum comparison invests 600 at the first price. Both are valued at each displayed price, including uninvested staged cash, which earns zero. Rising, falling, and recovery paths are selectable.
Where this idea is useful
A practical use
The staged strategy can buy more shares during a fall, yet delayed exposure can trail lump-sum investing during a rise.
A common misconception
“Regular purchases always beat a lump sum.”
Staging helps on some paths and trails on others. Price evolution, cash availability, cash interest, transaction costs, and risk preferences all affect a comparison.
What this explanation leaves out
- These paths are invented and selected after the fact. Staging an existing cash pot differs from investing income as it arrives. No dominance claim, costs, taxes, or cash interest are assumed.
Why does the recovery path end with more staged shares?
Equal amounts buy more shares at its temporarily lower prices. The invented recovery later values those extra shares more highly, but that recovery was not guaranteed in advance.
Are you choosing how to invest money already available, or how to invest income that has not yet arrived?
Further reading
Explore the original research or the teaching reference behind this experiment.