When summer is just starting and the sun is out and warm, and you step into the pool for the first time – you’ll quickly realize that even though its 90 and sunny out, the pool still remembers the cold winter before. So what do you do? Do you tend to dive in and get it over with quickly, or do you try to acclimate slowly, getting in inch by inch? Well how you answer that question tells advisors a lot about your investing strategy.
You may have heard the term dollar cost averaging or DCA before. The idea is you take a section of your funds and invest it at regular intervals over a set time period and since you’re buying at high and low points, it ends up that your average cost per share is the average over that time period. This is attractive because it allows you to take advantage of any dips in the market and reduce your cost per share, instead of buying all at once and then the market dropping after.
This sounds good in theory, but does it work? And does it even make sense to do that if, on average, markets are always rising?
Table of Contents
Problems with DCA
Upward trend
We believe at Hamilton financial planning that ultimately, in an upward trending market (like the us stock market) dollar cost averaging actually increases cost per share over time, and in that market situation you would more often than not be better suited to buy everything at once as soon as possible.
The data shows this. The S&P500 has been steadily trending upward over the past 100 years, and while there are drops and pull backs frequently, you cannot deny that the market is trending upward.
The average growth rate has been 10% over the past 100 years. This means on average your price per share is increasing by 10% a year. Dollar cost averaging then is costing you rather than helping.
Has a cognitive cost
We also believe that good investing should be a boring activity, akin to watching paint dry or grass grow. Investing shouldn’t feel exciting or high risk. Thats gambling. By keeping investing boring we typically get better returns than the gamblers. The data backs this up. A study by DALBAR QAIB shows that active investors on average return 3.2% less than the passive investor!
The less you handle your investments the better. Ultimately, this means that dollar cost averaging strategies, even if they are on auto-buy, still requires too much active participation from people, and leads to checking your investments too much, which leads to FOMO, anchoring, the disposition effect, or any other 50 emotional biases investors face, which then leads to changing investments and strategies, which will reduce portfolio returns.
Point is – investments are like soap, the more you handle them, the more they disappear.
However, by no means is dollar cost averaging a bad practice. It absolutely has its place in the world of finance.
Benefits of DCA
Good to build habit of investing
If you don’t have a lump sum of cash to invest all at once and instead are getting a little bit of income to invest (for example taking out a portion of each paycheck to invest every month), then you are much better off doing that than waiting to invest all at once. Time in the market is the strongest compounding factor you have as an investor, and by investing what you have when you can, you not only use time to your advantage but you build the good habits of investing.
Avoids buying at market peak
Dollar cost averaging does have some logic to it. By DCA you are ensuring that you don’t buy at a market peak. Thinking about it, from a physiological POV people are loss averse, meaning that they would rather get less returns if it meant that they wouldn’t lose any money. Because of this, so many would rather take the poor returns if it means they wouldn’t have to live with the “regret” of buying at the market peak only for it to fall 20% the next day.
Now here’s the Kicker
In volatile markets DCA actually performs better (around 1/3 of the time) !
Studies conducted by Vanguard research in 2023 concluded that lump sum investing performs better than DCA 2/3rds of the time. Meaning 1/3 or 33% of the time, DCA is actually the better way to go from a total return standpoint.
Why is this?
Simply – Markets generally go up 2/3rds of the time. So if you do one round of investing, in a rising market your next round will be more expensive and buy you less shares.
However, 1/3 of the time, when markets are volatile, with frequent highs and lows, then DCA does perform better, if the market is highly volatile or you’re in a bear market drop.
So will you dive in or wade in?
Ultimately what we do is different for every one of our clients, and more often than not its a personal decision, so if you’re the type to dive into the cold pool and get it over with or if you like to get in inch by inch, we are happy to invest however you direct us.
If you’re curios about if DCA would make sense for you, you can schedule a free call with us on our website and we can answer any questions you may have.
If you have any questions head to HamiltonFinancialPlanning.com to find out more and schedule a free call with our fee only CFP fiduciary advisors who specialize in helping build financial plans and investment management for clients nearing retirement in Austin and Houston TX.
About Scott
Scott Hamilton is founder and chief financial officer at Hamilton Financial Planning in Austin Texas, a wealth management firm that specializes in providing comprehensive financial planning for retirees. With over 20 years of experience in the financial industry, and having completed over 250 financial plans for retirees across all industries, but mostly the oil and gas industry, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals. He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.
This is for educational purposes only and is not personalized tax or investment advice. Rules are current as of 2026 and subject to change.
Sources and more reading:
Recent Blog: https://hamiltonfinancialplanning.com/blog/standing-on-the-edge/
Why Diversify Globally?: https://hamiltonfinancialplanning.com/blog/why-diversify-globally/
