The Pros and Cons of Dollar-Cost Averaging (2024)

Do you have money on the sidelines, but are unsure if now is the right time to invest? To take the emotion out of this decision, many recommend the concept of Dollar-Cost-Averaging (DCA). DCA is an investment strategy in which equal dollar amounts are invested in the market at regular time intervals for long-term growth. You may not know the term but are familiar with the concept. It is commonplace with respect to retirement savings, executed via systematic payroll deductions. That payroll deduction is then invested each period, allowing us to accumulate wealth over time. As with any investment strategy though, there are pros and cons to each approach.

What stage of life you are in and what you are trying to achieve, among other factors, will dictate what investing approach is best suited for you. A DCA strategy may be especially relevant to those with limited future income sources and limited market exposure who are considering investing a significant portion of their assets. However, if you compare a DCA investment strategy to that of investing a lump sum all at once, dollar-cost averaging may provide more peace of mind, but this comes at a higher cost and with little benefit over a longer investment period. The concept of a DCA approach has some appeal, but it turns out that while it may provide an emotional benefit (mitigate the inherent fear of starting to invest at a market peak), it rarely provides a financial benefit.

To put things into perspective, let’s review the data over time and quantify the results of using a dollar-cost averaging strategy relative to investing your money all at one time. Below are the results of a six month dollar-cost averaging strategy implemented over three periods in market history and the success relative to a lump sum investment.

What we see is that a dollar-cost averaging approach only results in a better outcome than putting the money to work all at once if the investment declines at some point during the period. In other words, it won’t cost as much if you buy into the market when it is down. The challenge is stocks have an inherent upward bias over time, in other words in the long run the market moves higher. The longer the period examined, the more likely that appreciation will occur. This means that if you are averaging into a position over a long time, you may not do as well as if you had simply invested a lump sum at the beginning of the period considered. Said another way, odds are it will cost you more to buy into the market during the predetermined set intervals because the market tends to move higher in the long run. Alternatively, your chances of avoiding the increased cost by investing it in a lump sum are greater.

Reviewing the table, since 1926, the odds of a six-month DCA strategy producing more favorable results is only 36%, and the average opportunity cost for a 6-month period is 1.8%. In the last decade, the odds of DCA success are only 21%, with an expected cost of 2.7% for the period. Not surprisingly, DCA had a better than a coin-flip chance of working in the S&P’s worst decade (2000-2009), which includes both the tech bubble bursting and the financial crisis. Even so, the average gain was only 0.5%.

The Pros and Cons of Dollar-Cost Averaging (1)

Historically, during market extremes like the 1932 Great Depression where the market fell almost 50% in three months before fully recovering that summer, a dollar-cost averaging approach would have saved the investor more than 43%. Yet one year later, the same exercise of systematically entering the market over six months would have left an investor 60% behind a lump sum investing approach at the beginning. More recently, if one averaged into the market over six months prior to March 2009, the investor would have saved 20%. Conversely, if you started a six month DCA program in March 2009 you would have lagged 22% behind the lump sum investor as the bull market rally had begun. Timing the market is extremely difficult.

Although mathematically the odds are stacked against dollar-cost averaging working, it can be beneficial it certain circ*mstances such as when the market trends lower during the purchase phase or the investor is seeking assurance and comfort lessening the blow if bad things happen. DCA is essentially an insurance policy against an extreme event which is difficult to predict and whose “premiums” will be paid without ever "filing a claim".

Establishing an investment plan appropriate for your goals and sticking to it is more important than trying to pick the perfect entry point. The investment allocation selected is more critical to long-term success than selecting the perfect day to begin.

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The Pros and Cons of Dollar-Cost Averaging (2024)


The Pros and Cons of Dollar-Cost Averaging? ›

Dollar cost averaging is an investment strategy that can help mitigate the impact of short-term volatility and take the emotion out of investing. However, it could cause you to miss out on certain opportunities, and it could also result in fewer shares purchased over time.

What are the flaws of dollar-cost averaging? ›

The advantages of dollar-cost averaging include reducing emotional reactions and minimizing the impact of bad market timing. A disadvantage of dollar-cost averaging includes missing out on higher returns over the long term.

Is dollar-cost averaging a good strategy now? ›

DCA is a good strategy for investors with lower risk tolerance. If you have a lump sum of money to invest and you put it into the market all at once, then you run the risk of buying at a peak, which can be unsettling if prices fall. The potential for this price drop is called a timing risk.

How often should you invest with dollar-cost averaging? ›

Consistency trumps timing

It sounds technical, but dollar cost averaging is quite simple: you invest a consistent amount, week after week, month after month (think payroll contributions going into your 401(k) account) regardless of whether the markets are up, down or sideways.

Is it better to DCA or lump sum? ›

The data shows lump-sum investing often works in favour of investors. But if you are finding it hard to get back into the market, a DCA strategy can help you take that important first step. It can also provide a smoother investment experience.

What is the advantage to using dollar-cost averaging? ›

But they could end up buying just as stocks are about to drop. Dollar-cost averaging can help take the emotion out of investing. It compels you to continue investing the same (or roughly the same) amount regardless of the market's fluctuations, potentially helping you avoid the temptation to time the market.

Why do you think dollar-cost averaging reduces investor regret? ›

Dollar-cost averaging makes it easier to stick to the plan

In hindsight, after the market has recovered, investors often regret not taking advantage of what they now know to be a great buying opportunity.

What is dollar-cost averaging Warren Buffett? ›

“If you like spending six to eight hours per week working on investments, do it. If you don't, then dollar-cost average into index funds.” Buffett has long advised most investors to use index funds to invest in the market, rather than trying to pick individual stocks.

When should I start dollar-cost averaging? ›

Even great long-term stocks move down sometimes, and you could begin dollar-cost averaging at these new lower prices and take advantage of that dip. So if you're investing for the long term, don't be afraid to spread out your purchases, even if that means you pay more at certain points down the road.

What is dollar-cost averaging used to avoid buying? ›

Dollar cost averaging is a strategy to manage price risk when you're buying stocks, exchange-traded funds (ETFs) or mutual funds. Instead of purchasing shares at a single price point, with dollar cost averaging you buy in smaller amounts at regular intervals, regardless of price.

What is the best way to do dollar-cost averaging? ›

The strategy couldn't be simpler. Invest the same amount of money in the same stock or mutual fund at regular intervals, say monthly. Ignore the fluctuations in the price of your investment. Whether it's up or down, you're putting the same amount of money into it.

What is a downside of the share price dropping? ›

Key Takeaways. When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Drops in account value reflect dwindling investor interest and a change in investor perception of the stock.

Is dollar-cost averaging good for retirement? ›

Dollar-cost averaging offers the greatest benefit to investors who have a long-term investment horizon and can afford to be patient. Especially if they started such a discipline early on in life. If you don't have a long-term investment horizon, it may not be the best way for you to invest.

What is the best day to DCA? ›

The Best Day to Weekly DCA Bitcoin

Similar to the best time of the day to DCA, we also found a weekly pattern. Since 2010, Mondays have had the highest odds of having the weekly low price relative to the weekly high price falling on this day. This pattern holds up over the last 12 months.

Should I dollar-cost average if I have a lump sum? ›

You may be thinking: What if I invest this huge sum of money at once and the market takes a downturn soon after? What happens to my returns then? If that's your mindset, dollar-cost averaging may be the strategy for you. In other words, you don't want to have any regrets and you want to minimize the downside risk.

Is dollar-cost averaging guaranteed? ›

Although dollar cost averaging is a good method for long-term investing without having to navigate market fluctuations, you aren't guaranteed a profit or protected from loss in a declining market.

Does dollar-cost averaging decrease risk of loss? ›

Dollar-cost averaging can help you manage risk. This strategy involves making regular investments with the same or similar amount of money each time. It does not prevent losses, and it may lead to forgoing some return potential.

Is dollar-cost averaging better than timing the market? ›

Dollar cost averaging is often considered more suitable for novice investors, as it requires less knowledge and experience to implement. Market timing, however, may be more appropriate for experienced investors who have a deeper understanding of market trends and the ability to analyze and interpret market data.

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