The Dollar Cost Averaging Dilemma: It Doesnt Work
There is an old maxim in trading: if it feels comfortable, then you are probably doing it wrong. Dollar Cost Averaging is one such strategy – it is designed to make you feel better, not make you more profitable.
For some odd reason, this topic has been bombarding my inbox for the past week. I have had all manner of spruikers pushing this as an idea. I suppose it’s the idea you have when you’ve run out of ideas. Unfortunately, as with many things in investing, that sounds good, but it doesn’t hold up to scrutiny.
Since it appears to be the topic of the day, it is time to take a big stick to it again.
The idea is simple and seductive: invest a fixed amount of money at regular intervals—typically monthly or weekly—regardless of market conditions. In theory, this smooths out market volatility by buying more shares when prices are low and fewer when prices are high, thereby reducing the average cost per share over time.
But while this may sound intuitively appealing, the academic literature is mainly unconvinced. Behind its mass-market popularity lies a hard truth: DCA is often mathematically inferior to lump-sum investing and is propped up more by behavioural biases than investment logic.
1. DCA Underperforms in Most Market Conditions
The most comprehensive study to date comes from Vanguard (2006, updated 2012) in a research paper titled “Invest now or temporarily hold your cash” . They found that lump-sum investing (LSI) outperformed DCA around two-thirds of the time across various rolling periods.
“DCA has lower expected returns than lump-sum investing because markets tend to rise over time.”
– Vanguard Research
Their conclusion? DCA is not a return-maximising tool—it is a behavioural compromise that sacrifices return potential in exchange for a smoother emotional ride.
2. DCA Is a Psychological Crutch, Not a Strategy
In the Journal of Financial Planning, Milevsky and Posner (2003) framed DCA not as a rational strategy, but as a behavioural device that reduces regret. According to expected utility theory, investors seeking to maximise returns should invest their available capital immediately. DCA delays that exposure and therefore delays risk and reward.
“Dollar cost averaging is suboptimal when judged by standard economic utility theory. Its persistence is best explained by loss aversion and mental accounting.”
– Milevsky & Posner (2003)
This makes DCA a form of emotional insurance rather than financial optimisation. We are back to the problem of doing things to make you feel better, rather than increasing your profitability.
3. It Doesn’t Eliminate Risk—It Just Defers It
One of the common selling points of DCA is that it “reduces timing risk.” While it’s true that DCA avoids the pitfall of investing everything at a market top, it merely spreads timing risk across multiple points—it doesn’t eliminate it. In trending markets, especially bull markets, this delay results in higher average purchase prices and lower overall returns.
4. The Sell-Side Loves It—for the Wrong Reasons
DCA’s popularity among financial advisors, advisors, and investment platforms stems from its predictability and regular cash flow, not because it maximises investor returns. Encouraging monthly contributions fits the business model of platforms that benefit from recurring deposits, asset-based fees, and engagement metrics.
But what works for the sell-side often doesn’t work for the investor. For those who doubt this, pick up a copy of the classic Where Are The Customers Yachts by Fred Schwed Jr.
If It Makes You Feel Better, You Are Doing It Wrong
Dollar Cost Averaging persists not because of superior returns, but because it provides psychological insulation from the perceived risks of market timing. It is a classic example of what behavioural economists Kahneman and Tversky described as “loss aversion”—the tendency for people to experience the pain of loss more acutely than the pleasure of equivalent gain (Kahneman & Tversky, 1979).
By parcelling out capital slowly, DCA reduces the likelihood of immediate regret, particularly the regret of investing a lump sum right before a market correction. This form of regret minimisation leads investors to overweight emotional safety over expected value.
In reality, investing is about embracing uncertainty. Risk and discomfort are not bugs in the system—they are the defining features. To quote economist Richard Thaler, a pioneer of behavioural finance:
“If you eliminate the risk, you eliminate the reward.”
DCA soothes emotional volatility but dulls financial performance. It appeals to the part of the brain that craves narrative control, even when that control comes at the expense of the outcome. As such, it is less a strategy and more a coping mechanism—a way to feel better while statistically doing worse. It highlights a recurring theme in behavioural finance: investors often prefer feeling safe to being right.
