Is Dollar-Cost Averaging Dead?

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My Great Aunt passed away in October at the age of 101.  She lived a long and full life.  She never had any children of her own, so my Dad and his sister became the children that she never had.  In turn, my sister, my cousins, and I became her grandchildren.  

 

dollar-cost-averagingShe loved going to church and a good glass of whiskey (preferably Lagavulin) after dinner every night.  She worked at the CIA until she retired and then look a job at a florist.  In her old age, she was a tough nut to crack.  I can’t imagine that she put up with too much in the old boys’ club that was the CIA back in the day.

 

My Great Aunt’s Estate

My Dad is the executor of her will and has been working to finalize everything.  I’ve never been an executor of a will, but it seems like a lot of work.  You would think that it’d be easy to prove someone had passed away and quickly close up the estate.  I definitely didn’t realize how much paperwork was involved in order to get everything in order.

 

He recently informed me that I would be receiving a small inheritance.  I honestly didn’t think I would receive anything, not because she didn’t love me, but because I really didn’t think she had any money.

 

dollar-cost-averagingHer husband passed away while she was in her 40s.  As a result, she was on her own financially for the rest of her life.  She always seemed to be scraping by on her small government pension, so when I found that I’d be receiving a small inheritance, I felt a little guilty.  I would have much rather seen her spend that money on herself.  

 

I am incredibly grateful for the inheritance though, but I want to ensure that I use the money wisely.  So now I am debating what is the best way to do so.

 

The Best Way to Invest

dollar-cost-averagingA couple of months ago, I went through an exercise trying to determine the best day to invest in the stock market.  I figured that based on this exercise, it probably made sense for me to figure out how often I should dollar-cost average.  

 

I started researching to see if there is a specific interval that made the most sense.  Financial experts say that you should dollar-cost average, but rarely does anyone say what the intervals should be.  I researched far and wide to figure out if it made more sense to dollar-cost average weekly, monthly, quarterly, or yearly.

 

What Is Dollar-Cost Averaging?

dollar-cost-averagingBefore I get too far, I want to make sure everyone understands what dollar-cost averaging is.  Dollar-cost averaging (DCA) is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.  Since stock prices fluctuate every day, the investor can purchase more shares when prices are low and fewer shares when prices are high.

 

Do you know what I found in my research?  Nothing.  I couldn’t find anything findings to support the specific intervals that you should buy into the market.  There was advice saying you should buy monthly or quarterly.  But I couldn’t find any specific research to affirm this point of view.  

 

Now here’s the even crazier part about what I found.  Dollar-cost averaging is actually not the best way to maximize your returns.  Do you know what is the best?  Lump-sum investing.  

 

Timing the Market

dollar-cost-averagingIf you find that shocking, you’re not the only one.  Let me walk you through some of the research.  But before I do, let me reiterate one of my favorite quotes.  “It’s not timing the market, but time in the market that matters.”  

 

Isn’t dollar-cost averaging a type of timing the market?  Well, with dollar-cost averaging, you essential admit that you won’t anticipate the trajectory of the market.  You space out when you will buy into the market, so that it hopefully evens out over time.  So if you buy into the market when it’s too high one month, theoretically the market would be lower in the future to balance it out.

 

In theory, it sounds good to do this.  But, what are the actual results?

 

Why Lump-Sum Investing is Better than Dollar-Cost Averaging

dollar-cost-averagingVanguard did a study where they backtested a portfolio using the S&P 500 during a rolling 10-year period from January 1926 through December 2011.  This means that essentially that they looked at January 1926 through December 1935 and then every monthly and yearly iteration in between and through December 2011.  This equaled 1,021 iterations in total, in the US stock market.  

 

Vanguard found that lump-sum investing outperformed dollar-cost averaging roughly 66% of the time, investing solely in the S&P 500.  Vanguard says the results are “really quite intuitive. If markets are going up, it’s better to put your money to work right away to take full advantage of the market growth. We found that any factors unrelated to market trends had a minimal impact on the results.”

 

The study goes on to show that if you had lump-sum invested using a 60/40 stock to bond mix, that your portfolio on average would beat dollar-cost averaging by 2.3%.

 

These numbers were shocking to me at first, as I always thought that dollar-cost averaging was the preferred methodology.  

 

So, Why Dollar-Cost Average?

dollar-cost-averagingReading through the various commentary, it comes down to the psychological benefits of dollar-cost averaging.  

 

The biggest down side to lump-sum investing is that people try to time the market.  They think that if they have all this money on the sideline that they need to pick the perfect entry point.  Although, with lump-sum investing, one is suppose to jump into the market immediately.  However, when people do try to wait for the ideal time, their analysis causes paralysis.  In turn, experts push investors into dollar-cost averaging to alleviate some anxiety.

 

Investors are inherently scared to invest all of their money at one time.  If the market goes down, the sense of regret can be unbearable.  By using dollar-cost averaging, these investors can sleep better at night not worrying as much if they happen to buy high because they have a chance to buy low at a later date.

So readers, do you dollar-cost average?  Are you willing to forgo an extra 2% on your portfolio to sleep better at night?  Share your thoughts below.

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82 Comments

  1. Hi MSM,

    Good on your Great Aunt for doing so well, especially in that day and age when she would have had to give as good as she got in the CIA!

    I have to say its an interesting one I’ve seen some research that shows better to just put money straight to work as well. As it stands my new tax year investments will be equivalent of DCA (or GBP CA as I am in the UK), but this is because that is when I have the funds available each month.

    Having said that I am as guilty as sin in trying to time the market with my actively managed portfolio – I have been sitting on a fairly large whack of cash since January waiting for a good time to invest, so I have already missed out on a quarterly dividend payment from the VHYL. I just need to shove it to work as soon as possible!

    Cheers,
    FiL
    FIREin’ London recently posted…March ’17 PerformanceMy Profile

  2. I dollar cost average in my 401k because I get paid every 2 weeks. It just makes sense. For my Roth IRA, I invest the full $5.5k when I contribute.

    One point you don’t address is liquidity – nearly 70% of Americans don’t have $1,000 in the bank. As a result, how can we expect someone to put a lump sum into investments at any given time? Therefore, it only is reasonable to expect a person to dollar cost average if they are going to invest.

    Thoughts?

    Erik
    Erik @ The Mastermind Within recently posted…New! The Mastermind Within Debt Destruction Tool!My Profile

    • Thanks for stopping by Erik!!! I thought interesting what the research showed. It definitely was not what I expected. In terms of 70% of Americans having less than a $1,000, the government needs to educate people much better since it’s clear the financial education that they are receiving is not quite up to par.

    • Thanks for sharing Liz!!! I have to admit that DCA makes a ton of sense in my head but the research shows differently. There are definitely times I wish I could have thrown all my money into the market in 2009 instead of DCA 🙂

    • Yes, lump sum investing is just throwing in all your money at one time instead of spreading it out over weekly, monthly or quarter intervals like dollar cost averaging.

  3. It depends. With a lump sum to invest it all goes in at once as I don’t believe in market timing. With period income I dollar cost average. Why? I realize I can’t Time the market to know when to put in. Time in the market is superior. So getting my lump sum in sooner is better as Vanguard illustrates. This comes into my regular payments as dollar cost averaging puts them in he market sooner. I do feel on the whole DCA would be superior in both cases if you could make it truly random. But I just don’t believe as a human that’s possible. Psychology is one thing, but even setting a schedule to avoid psychology is not random.
    FullTimeFinance recently posted…Comparison is Human Nature, To Resist or Give in?My Profile

    • Haha…you are absolutely correct. Setting the schedule is still not random 🙂 I have to admit that the stats definitely surprised me. Definitely not what I thought going into it.

  4. I was going through a similar scenario last year when I refinanced my mortgage to borrow more money to invest. I actually did a combination of three strategies: dollar cost averaging, dividend income investing and timing the market. I did DCA and dividend investing by buying dividend paying stocks over a period of time. I also had a list of stocks that I wanted to buy so I bought the stock that dropped a bit when my purchasing interval was up.

    I have a pretty high tolerance for marketing fluctuations so I don’t lose much sleep when the market drops.
    Leo T. Ly @ isaved5k.com recently posted…Financial Literacy For CanadiansMy Profile

    • Thanks for sharing Leo!!! I definitely think risk tolerance is huge in whatever decision that you make. I can definitely understand the psychology behind DCA 🙂

  5. Since seeing that Vanguard study I have basically put my money in as soon as possible. Like you said, it’s about time in the market. Dollar cost averaging is usually better than saving up your money to then invest a lump sum, but investing a lump sum as soon as you have it is usually better than dollar cost averaging.
    Matt @ Optimize Your Life recently posted…Politics and the Things We Can ControlMy Profile

    • I totally agree Matt!!! Pushing the money as quickly as you can at least according to the study by Vanguard is optimal. Definitely wouldn’t have guessed that when I first started to research things.

  6. I’ve read this too.

    Time in the market > Timing the market

    Put your money to work as soon as possible to give compound interest more time to work its magic. I’m curious if the study went into more detail on the 34% of time that dollar cost averaging outperformed lump sum. Were those all declining markets? That would make sense. If you invested a lump sum on the day before the market crash, you undoubtedly would be worse off than if you dollar cost averaged in while the market was on its way down.

    As for me, I’m a dollar cost averager simply because I invest my money when I receive it, which is every 2 weeks. When I received my bonus back in February, I did but all of that money to work immediately, which was good timing since the market did really well that month.
    Go Finance Yourself! recently posted…Investment Update: Q1 2017My Profile

  7. Mostly I DCA just because I rarely find myself with a large sum of money to invest at once. When I do, I make one big purchase at once. Especially if it’s a stock or ETF with a trade commission.
    To be honest, I do wait to make additional trades when a fund is trading at a 52-week high, so I do time the market with a portion of my portfolio & I try to wait for Mondays after reading your post.
    Josh @MoneyBuffalo recently posted…Great Ways to Diversify Your Portfolio Away From Stocks for the Next 5 yearsMy Profile

    • I’m really curious have you noticed any trends with buying on Mondays? I noticed today was up but I’m curious about some of the other Mondays recently.

  8. That’s an interesting study and it makes sense, but I wouldn’t have expected that outcome.

    I think it goes back to how often do you get lump sums to put into the market? I’m fortunate enough to sometimes get a bonus and then it goes into the market, but otherwise we just dump in our set amounts each month, and go that route.
    Mr. SSC recently posted…An SSC Interview: A FIRE side chat with The Green SwanMy Profile

    • Thanks for sharing Mr. SSC!!! The study and research definitely didn’t go in the direction that I thought it would. I thought for sure DCA was superior but clearly I was wrong.

  9. While the returns may be better with lump sum investing, dollar cost averaging can make some people a lot more comfortable with taking the risk. Sometimes the appearance of risk can be more paralyzing than the actual risk. If the illusion helps people invest greater sums, even if the return isn’t optimal because of extra fees and slightly lower returns, it may be a better strategy for some.
    Emily Jividen recently posted…State of the Blog March 2017My Profile

    • Thanks for stopping by Emily!!! I definitely agree that DCA is psychologically probably more feasible for most people. Seems like it’s easier to bare if the stock market were to go down.

    • Thanks for stopping by The Magic Bean Counter!!! I definitely would have thought being more conservative would have been the preferred method with investments but clearly being aggressive pays off 🙂

  10. I agree that math argues for lump-sum, but I think if you’re seriously risk-averse and view down scenarios worse / asymmetrically with up scenarios, dollar-cost averaging could still make sense.

    If someone handed me a meaningful windfall, I imagine I’d give myself a year to get it in play, and would be fine if I left some money on the table.
    Paul recently posted…The Delights of Double DeductionsMy Profile

  11. Most people dollar cost average because they don’t have a lump sum to invest. They invest a portion of each paycheck. Most 401k are DCA’ed.

    When I inherited my father’s estate, he had a lot of cash that I wanted to invest. I would decide what to invest in (ETFs or individual stocks). I then subtracted 5% from the previous day’s closing price. I placed a 30 day market buy limit order. If the price struck, the order was fulfilled. If it didn’t strike, the order expired and I would place a market buy order on the 31st day.

    Back when I was mostly in mutual funds, I would DCA because the commission wasn’t explicitly added to each transaction. Since I am mostly ETFs and individual stocks now, I only invest/buy when the commission is less than 0.1% of the purchase order.

    • Thanks for sharing Dan!!! I always appreciate your unique insight and am waiting when you start your own blog so I can read some more of your experiences 🙂

  12. I appreciate the food for thought, Rob. Investing in general is something I do need to become more versed in. However, I do invest in my TSP account at the day job. I use Dave Ramsey’s suggested percentages for each fund: 60% for Common Stock and 20% each for Small-Caps and International. That’s what he suggests.

    Interesting and thought-provoking as always. Thanks!

    • Thanks for sharing Dave. Interestingly enough Jim Collins suggests in his stock series a 75/25 split between C and S to get a blend of VTSAX (The Vanguard Total Market Index Fund).

  13. I’m sorry for your loss MSM, but I’m glad to hear she lived a full life. I definitely believe that more time in the market = more market success. I don’t think many of us have a lump sum amount to invest, unless we don’t contribute anything to our paycheck and do it all once or twice a year. But I’m not sure if I would get the company match that way, which is free money! I think people may feel more comfortable in DCA because they don’t have to always be worried about if they bought too high and accept the fact that many of us are not experts so this is a way to sort of hedge the ups and downs of the market.
    SMM recently posted…Why I Don’t Buy In BulkMy Profile

    • Thanks for the condolences SMM!!! I defintely understand the psychology behind DCA and it makes sense in my head but when I see that lump sum investing beats it by 2% it makes me scratch my head.

  14. I’m all for dollar cost averaging, but I think the difference is in why I do it. In the Vanguard studies you start with a fixed amount and either dump it all in at once, or drip feed it. I don’t have the big fixed lump sum – I have been drip feeding a weekly investment for the last three years. I’m sure if I could have put that money in in one hit at the start it would have performed better, but I didn’t have it.

    That said, when I do get big amounts like annual bonuses or tax returns, I tend to throw it straight in. I have no idea how to time the market, so better to start straight away than sit on my hands and miss out. The one time I tried to time the market it looked like stock prices had bottomed out so I threw some extra money at them. Then they dropped another 5%, haha, oops!
    LadyFIRE recently posted…DTF: dollars to fun ratioMy Profile

    • Thanks for sharing your perspective LadyFIRE!!! I thought that the study was really interesting and definitely not something I anticipated seeing. Timing the market is really hard. I think that’s why you see so many sell at the bottom and buy at the top 🙂

  15. Great post! DCA is bad only if you had the option of the lump sum investment and didn’t use it.
    My 401k contributions are forced to do DCA because I put a certain % of my salary into the plan and my company matches a certain %. I do this not because I want to but because I have to. If my company handed over the entire salary on January 1 I would invest one large lump sum (that’s what the Vanguard study shows), but that’s not how the world works.
    If I have the option to invest one large lump sum, say, after receiving the annual bonus, I certainly make sure I invest that as a big lump sum. Even if it goes against me short-term I can always use tax loss harvesting.
    earlyretirementnow recently posted…You want to know our savings rate? Which one?My Profile

    • Thanks for stopping by EarlyRetireNow!!! I appreciate your kind words on the post. The only time that I can lump sum invest is when I contribute to my IRA 🙂 I make the lump sum every January and then forget about it!!!

  16. Nice. Who would of thought? I dollAR cost average, but at the same time I guess time the market. If a stock I want is at a 52 week high I’ll find another to invest in. I have been debating refinancing our house for some of our equity to max our tfsas and rrsps. I dunno if I could throw 100k in the market currently. Seems to high. Dollar cost averaging might be better for me to sleep at night. But missed dividend income would suck as well. Either way suprising result thanks for schooling me!
    Passivecanadianincome recently posted…Life’s A FilmstripMy Profile

    • Thanks for sharing Passive Canadian Income!!! I don’t think I realized how much psychology was in personal finance. Between the debt snowball and dollar cost averaging I definitely find it interesting what helps people sleep at night 🙂

  17. I mostly DCA. For all the administrative reasons everyone else does like getting paid every two weeks. However, My wife just did a rollover. And I have been slowly buying medium sized chunks of shares over time. It feels much different. I keep waiting for that 10% dip but it never comes. Regardless of what the stats show, i feel like most people are just so bad at timing the market. How many people thought the market was going to tank after the election. I think i will stick to my DCA for now.
    good post.
    ReachingTheCrest recently posted…Turning a Failure Into a Future SuccessMy Profile

    • I believe that the last time the market dipped was February of 2016 if I remember correctly but that feels forever ago at this point. I have heard on average that the market drops every 11 months if that makes you feel any better 🙂

  18. Great post. We typically don’t DCA, but I do see the benefits to doing it. Typically we research an investment, try to determine a fair value for that investment and then invest when that security goes below our estimated value. We are long term investors, so we are not trying to time the market, rather just waiting for the securities to “go on sale”. My husband and I will usually buy about half the security one day and then wait a week or two to see if that security drops further and purchase the remaining half. If it doesn’t and the price hasn’t moved to significantly we will add to our position anyway. If we got lucky and the stock jumped, we will sell and consider that a trade rather than an investment.  The result is that we are not full invested at all times, typically there is 5 to 10% sitting in the IRA or investment accounting waiting for the next opportunity. 
    Courtney @ youraveragedough.com recently posted…How to Avoid DebtMy Profile

    • Thanks for sharing your investment strategy Courtney!!! I leave 10% of my portfolio to try out new stock ideas. But for the most part I’m pretty boring buying passive index funds 🙂

  19. It would be better to combine lump-sum investing and Dollar cost averaging.When the market is low, buying with a large amount of money. At the same time, sticking to buy with dollar-cost averaging every month. I use this combination.

  20. So sorry to hear about your Great Aunt, but it’s quite something that she lived so long. I can’t imagine making it 101 years. What she’d seen in her days. I’ll bet she was quite the character.

    Interesting research on Lump Sum vs Dollar Cost investing. I would have thought that DCI would have outperformed lump sum.

    We’ve had the opportunity to do both, but mostly have done DCI, which has worked out well for us. Luckily, we were smart enough to Lump Sum Invest when we did, instead of blowing our windfalls.

    I’ll be looking forward to more of your good stuff!

    • Thanks for stopping by Shin!!! She definitely lived a full and long life 🙂 I wouldn’t have thought they research would have yielded the way it did either. It’s always surprising how things shake out.

  21. Interesting topic! You can pick a time period and make any method of investing look good or bad. There is such a thing called a “black swan” and everyone forgets it.

    You could make a lump sum investment today and the market could crash tomorrow. Three years later, market may recover and be at the point where you bought in by lump sum. What have you gained?

    I don’t trust any brokerage firms report when it comes to this particular thing – they have vested interest. A lump sum investment means money in brokerage’s coffers.

    DCA is a good insurance against market crash. You what is even better? Dollar Value Averaging – I call it the big brother of DCA.

  22. I don’t dollar cost average; I’ve done a similar analysis myself and found that lump-sum investing does better than dollar cost averaging a majority of the time. It’s hard mentally to lump-sum invest, especially in a falling market.

    • Thanks for sharing your first hand experience Wall Street Physician!!! Every time I buy I’m terrified if I picked the right day/time. So I definitely know the feeling. That’s awesome that you have first hand experience seeing the market work out so well for you with lump-sum investing!!!

  23. I’m a fan of lump sum investing when I can. I max our Backdoor Roths in one shot at the beginning of the year. 401k is regular monthly investments, but once my student loans are gone I might check and see if I can front-load my contributions since I’m self-employed. It would be nice to max out my 401k by March or April if possible.
    SomeRandomGuyOnline recently posted…New Attending Physician Baby StepsMy Profile

  24. I am a huge believer in doing what makes most sense for your individual situation. I have always done dollar cost averaging like most, due to the frequency in which I get paid. I have often considered continuing dollar cost averaging but withholding a percent in cash to wait for that big market dip. But, then I think about lost dividends, and the anxiety over trying to time the market(which I know I’m not good at). So, I think I will continue with my current method. However, I do agree with some here that if I were to get a lump sum, I would probably be more likely to go ahead and invest it immediately rather than wait.

    • Thanks for stopping by Chad!!! I definitely agree it’s whatever you feel most comfortable with. As long as you’re investing in the market you should make money over time. I was just shocked about the lump sum investment numbers beating dollar cost averaging.

  25. I usually do a lump sum Roth, but found myself procrastinating with ‘what if I need the money’. ( I’ve also realized I have access to Roth funds I put in earlier if things got that bad, but I’d tap my taxable account first.) So I set up a small recurring monthly amount from savings to Vanguard so I see it and can’t be a complete slacker. My plan is to lump sum to max out the Roth. 401k is definitely dca but that is beyond my control.
    My grandparents lived a good life, frugal, but full and left money to my mom and aunt. They chose to use some of the money for a few family trips. 🙂 My mom also paid off her mortgage and then invested the payments instead which helped her retire a few years early.

    • Thanks for stopping by Jacq!!! I can definitely understand doing DCA vs. lump sum when it comes to the Roth. It definitely feels safer, I have to admit I was shocked by the numbers.

  26. Hey MSM,

    I extend my condolences for your loss. As far as DCA vs lump-sum, it depends on a person’s emotional make-up. I lump sum invest because I analyze businesses and invest a concentrated amount into companies that I view as undervalued. People who do not have the time or emotional fortitude to deal with volatility are better off DCA into a globally diversified portfolio with a value tilt.

    Holden
    Holden Alexander recently posted…An Introduction to ‘The Capital Clone’My Profile

    • Thank you for the condolences!!! I definitely agree that if you’re not worried about the swings of the market that lump-sum is the way to go. If it makes you nervous about the swings and keeps you up at night. DCA might be the preferred method.

  27. Interesting read, MSM. Thanks for sharing!
    I have been a big fan of dollar cost averaging for years. Strangely enough, when I started investing, I used to lump sum invest. As time went on and I became more focussed on dividend investing, I began to dollar cost average. Now, I tend to let cash build up a little more patiently. My strategy is to invest on down market days every time the cash portion reaches about $1000. Thanks for sharing!
    Graham @ Reverse The Crush recently posted…Blog Report for March 2017My Profile

  28. Dollar cost averaging is more than just overcoming the anxiety of actually investing, but it’s also a knowledge issue. I love finance, I really do. I’ve been an active participant in the market since I was 15 years old trading my own individual stocks. That said, now that I work a full-time job and work a side hustle as a Realtor, have a family, and still try to find time to write my blog, keeping up with the market is harder and harder.

    It’s much easier to just put in an established amount each month and then throw in a little extra when you feel a run coming.
    Cash Flow Celt recently posted…United Airlines: Did They Just Crash and Burn?My Profile

    • Thanks for sharing Cash Flow Celt!!! Dollar cost averaging is definitely a ton easier and makes life a lot simpler. It definitely sounds like you have your hands full between all your activities.

  29. I mostly just drip feed my account, partly because I wanna smooth out rough patches, but also cos that’s how my money becomes available. Most of the rest has another purpose, so I don’t often have a lump sum to invest, although I have contributed a few smaller lumps in the past without worrying too much
    Sarah @tortoisehappy.com recently posted…Aiming for debt freedom? Knowledge is powerMy Profile

    • Thanks for sharing Sarah!!! I definitely understand smoothing out the bumps 🙂 DCA definitely does a great job with that aspect of things 🙂 Plus it’s much easier from a psychological stand point!!!

  30. My husband and I do a bit of both. $500/week is deposited into Vanguard. We are holding onto $50,000. I am pro lump sum. In a way, I am timing the market but as I’m asking around, so are many others.

    I have no anxiety with lump sums. Personally I prefer to get it off my mind to dump and stockpile again. I’ll forward this to my husband, thank you so much for the read 🙂
    Lily @ The Frugal Gene recently posted…Easy Ways To Save Money Living In San FranciscoMy Profile

    • I’m glad you enjoyed the article. This was another one that I was surprised with the results about. Definitely wouldn’t have thought lump sum investing was better 🙂

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