Dollar Cost Averaging

## Dollar Cost Averaging

Dollar cost averaging (DCA) is the practice of investing a fixed amount at regular intervals (e.g. every paycheck) rather than investing a lump sum at once. For tech workers with regular salary income, DCA is the default strategy through payroll-deducted 401(k) contributions.

### How DCA Works

| Month | Investment | Price/Share | Shares Bought |
|-------|-----------|-------------|---------------|
| January | $1,000 | $50 | 20 |
| February | $1,000 | $40 | 25 |
| March | $1,000 | $60 | 16.67 |
| **Total** | **$3,000** | **Avg: $48.65** | **61.67** |

The average cost per share ($48.65) is lower than the simple average price ($50) because you buy more shares when prices are low.

### DCA for Equity Compensation

Tech workers receiving RSUs face a DCA-like pattern in reverse: shares vest at regular intervals at whatever the market price is. The optimal strategy for most employees is to sell vested RSUs and reinvest in diversified index funds using DCA.

### DCA vs Lump Sum

Research shows lump sum investing outperforms DCA about 67% of the time because markets trend upward long-term. However, DCA reduces the psychological risk of investing at a peak.