Fueling the Snowball: The Simple Math of Dollar-Cost Averaging

Hey everyone, Kevin Lynch Jr. here.

We had a blog a few weeks ago talking about the “snowball effect”—the powerful idea of how consistent saving and compounding can build incredible momentum over time, even if it is a small amount. As long as it is done consistently it can have a powerful effect.. The concept is straightforward: a small snowball, with time and consistent rolling, can grow into a formidable force.

That leads to a practical question we hear all the time: "So, how do I actually do that?" Especially when market prices are constantly moving up and down, it can feel like trying to roll that snowball on a bumpy, unpredictable hill.

One of the most established strategies for this is known as dollar-cost averaging. That might sound like a complicated financial term, but the math behind it is surprisingly simple and directly fuels the snowball effect. Let's break down the numbers.

The Core Idea: Consistency Over Timing

Dollar-cost averaging is the practice of investing a fixed amount of money at regular intervals, regardless of what the market is doing. Instead of trying to "time the market" by buying when prices are low, you commit to a consistent schedule.

The goal isn't to be a perfect market timer. The goal is to be a consistent participant. Let’s see how this works with a simple, hypothetical example.

A Year of Investing: A Tale of Two Strategies

Imagine you've decided to invest in "XYZ Corp." You have $1,200 to invest for the year.

Strategy 1: Lump Sum Investing

You decide to invest all $1,200 on the first day of the year. Let's say the share price for XYZ Corp. is $30.

  • $1,200 invested / $30 per share = 40 shares purchased

You now own 40 shares. Simple enough.

Strategy 2: Dollar-Cost Averaging

Instead of investing it all at once, you decide to invest $100 every month for 12 months. Now, let’s imagine the share price for XYZ Corp. fluctuates throughout the year—as markets often do.

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The Power of the Average

Let's review. By the end of the year, both strategies have invested the exact same amount of money: $1,200.

  • The lump-sum investment bought 40 shares at an average cost of $30 per share.

  • The dollar-cost averaging strategy bought 42.01 shares. The average cost per share here wasn't a simple average of the prices. It's calculated by the total amount invested divided by the total shares purchased: $1,200 / 42.01 shares = $28.56 per share.

Notice what happened. Because you invested the same dollar amount each month, your money automatically bought more shares when the price was low (like in March and October) and fewer shares when the price was high (like in June and July). This discipline brought your average cost per share down below the average market price.

This is the mathematical engine that helps build your snowball. By not worrying about the market's peaks and valleys and simply focusing on consistent contributions, you are systematically adding to your holdings, taking advantage of the dips without even trying. It removes the emotion and guesswork from investing and replaces it with a steady, momentum-building process.

It’s the financial equivalent of continuing to roll your snowball, whether the hill is steep or flat. Over time, that consistency is what really counts.

This content is for informational purposes only and is not intended as investment advice. Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets. Since this strategy involves continuous investment in securities regardless of fluctuating price levels, you should consider your financial ability to continue your purchases through periods of low price levels. Please consult with a qualified professional before making any financial decisions.