A guide to using the dollar-cost averaging strategy

A guide to using a dollar-cost averaging strategy that will protect your portfolio from market volatility in the current economic climate.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Many investors leap into the share market with a lump sum amount hoping that all of their new ASX shares will rise. Unfortunately, this is hardly the case. While some ASX shares will indeed be in positive territory, chances are there will be a few in the red.

Without doing the proper research on the shares beforehand, you are exposing yourself to a great risk of it falling in value. It pays to have a plan of attack to protect your portfolio should your quality share drop in value due to small company hiccups or macroenvironmental factors.

Thus, enter the dollar-cost averaging strategy (DCA).

What is dollar-cost averaging?

DCA is a simple strategy that involves investing an amount of funds in the same ASX share at regular intervals over a period of time.

For example, say you invested $1,000 in Zip Co Ltd (ASX:Z1P) shares at $6.00 a piece. You would own 166 shares of Zip shares. If the share price of Zip fell by 10% (to $5.40) after you had bought the shares, the current value would be $896.40.

Now, some investors may be happy to just wait until the Zip share price goes back past $6.00 again before possibly selling or just sit on their original investment for the long term. However, if you employed a DCA strategy, when the Zip share price falls to $4.00, you might possibly buy another $1,000 worth. You would then have your original 166 shares plus an extra 250 shares from your latest investment.

This would total 416 Zip shares at a cost basis of $4.80. It may not seem like much, but this 20% discount is just from your first regular investment interval. Eventually, you would smooth out your purchase price over time and ensure you're not dumping your money into the one share at a high price point.

DCA reduces the impact of market volatility on the overall purchase. It is known as a risk-reduction tool and can be very effective, especially in uncertain climates like the one we currently face.

It's worth considering, however, that if you are buying Zip shares at regular intervals and the price keeps going up, you will be increasing your cost basis and essentially getting less value than if your had initially purchased all the shares at once. Similarly, should the Zip share price keep falling and not recover at all, DCA would not be a wise strategy to implement.

Foolish takeaway

DCA is suited to investors with a lower risk tolerance and a long-term investment horizon.

I apply the DCA strategy across most of my ASX share purchases and have done pretty well with it. 

Tiptoeing in small increments during a market dominated by COVID-19 news will protect your portfolio and help to avoid slumps. Obviously there is no guarantee of good returns on any investment, and it is still important to research any company you wish to own a part of.

But overall, I believe company research and using the DCA strategy is a great way to build serious wealth.

Should you invest $1,000 in Betashares Australia 200 Etf right now?

Before you buy Betashares Australia 200 Etf shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Betashares Australia 200 Etf wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

Animation of a man measuring a percentage sign, symbolising rising interest rates.
Dividend Investing

Forget term deposits and buy these ASX dividend stocks in May

Interest rates could be heading lower so consider these shares that analysts rate as buys instead.

Read more »

Two pink pillar candles lit and shown with a pink background, indicating rosy news for the Dusk share price.
Dividend Investing

This ASX dividend share is expected to pay a 15% yield in 2026!

This small business is predicted to pay a huge yield.

Read more »

A woman presenting company news to investors looks back at the camera and smiles.
Dividend Investing

Analysts rate these top ASX dividend shares as buys this month

Income investors might want to check out these buy-rated shares.

Read more »

A businessman hugs his computer and smiles.
Blue Chip Shares

3 excellent ASX shares I would buy and hold for the next 10 years

Analysts think these quality companies could be in the buy zone right now.

Read more »

Man holding fifty Australian Dollar banknote in his hands, symbolising dividends, symbolising dividends.
Dividend Investing

Want $5,000 a year in ASX dividends? Here's how to build towards it

Here are three steps to take if you want to generate an income from the share market.

Read more »

A group of people in suits watch as a man puts his hand up to take the opportunity.
Blue Chip Shares

The ultimate blue chip portfolio: 3 ASX 200 stocks to anchor your investments

Starting your investment journey? Here are three stocks that Goldman Sachs rates very highly.

Read more »

Piggy bank at the end of a winding road.
Defensive Shares

Will lower interest rates boost ASX infrastruture stocks?

Let's take a look.

Read more »

Silhouette of CEO standing in conference room looking out at cityscape
Growth Shares

3 founder-led ASX 200 shares with serious long-term upside

Let's see what makes these shares top picks according to analysts.

Read more »