Does Dollar Cost Averaging Work?

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Does dollar cost averaging actually work? Let's find out together.

Dollar cost averaging is a method recommended for investing money for both beginning investors as well as seasoned veterans. And as a financial education channel, I feel it is my duty to put this theory to the test! In this video, I present to you my findings.

If you enjoyed this video you can check out some of my other videos at the links below!

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[nickgoodwin]

DCA was my only option because I was poor and didn't have a lump sum of anything to invest. Started with $50/month all the way to financial independence 22 years later. I always say the stock market is the fairest financial market. Nearly everyone has access to it. You don't need good credit, collateral, lump sum, etc. Race, gender, sexuality, class, etc are never an impediment. Just need a few dollars a month and some time.

[elliottamartin]

I think it's clear that if you have that lump sum, dollar cost averaging does not make sense over time. For my own investing (without a lump sum), I like dollar cost averaging because it takes the emotions out of investing. There's no gambling, market timing and speculating and I've become a disciplined investor on auto-pilot.

[patrickfournier]

If you have a lump sum, invest it. But don’t build up a lump sum to time the market. That’s the point

[InternetHustlerOfficial]

The best option is to combine those methods. Invest a lump sum amount and then maintain your continued investing of regular amounts. That way, you'll take advantage of the compound interest on the initial amount and you'll cover for any rises and falls with the regular investments.

[Bobbobbob]

This video is pointless. You didn't make any analysis of risk at all. Obviously expected average rate of return is higher the earlier you invest. To actually analyze risk you need to compare both methods at random points in time and compare what the greatest loss is. It's not just perceived loss. If it is something that is very high risk as in it keeps jumping between 1 to a hundred to 5 to 2000 the dollar cost averaging is much safer than investing at a random time. There's almost no chance you repeatedly always invest at a peak. If you invest all at once there's a significant chance you might have invested too high. Risk is the variance in investment returns and you never analyzed that at all.

[yevinorion]

The reason I do DCA is because I don't have a lump sum to invest. So this allows me to get in there and start investing at all. To me that's the biggest use-case for it.

[proHannuTorrekens]

Dollar cost averaging complately avoids the risk off investing a lump sum at an all time high. For example if you invested at an all time high in 2000 you would have to wait till 2007 to break even and just to have another crash next year and have to wait till 2012 to break even again.

[martinguila]

If one were to start dollor cost averageing in 2007 it seems clear to me that one should increase the amount after large downturns. It doesnt pay to wait for recessions, but if one happen to have a pile of cash and the market is down 20-50% I think thats a great time to invest more than you usually do.

[mpgirl]

Whether or not DCA works depends on your situation.
1. If you have a lump sum and no more money to invest, don't DCA. Simply have a 70:30 stock vs. bond or whatever percentage that suits your age and risk tolerance. If the market goes to shit, sell the bond part to buy stock and vice versa.

The reason is, by DCA, you don't eliminate the risk of investing at the peak, you simply DELAY it. You'll never know whether the market will tumble RIGHT AFTER you put in the last portion of your money.

DCA with just a lump sum is MARKET TIMING.
The expectation is that it will go down, at least during your DCA period. Problem is, nobody knows when. We all know how well market timing works. If the market keeps going up, DCA keeps lifting your cost along the way and missing the gain you would have had had you put in the lump sum in the beginning.

2. If you have a lump sum and can continue to invest, you don't need to DCA the lump sum. Put it in and continue to invest afterwards. It's like combing the two.


3. If you don't have a lump sum, you have no choice but to DCA.

There 's very little need for DCA except for psychological reasons. The insurance comes only with consistent DCA, which is often out of necessity rather than by choice. The benefit that comes with consisent DCA doesn't apply to splitting a lump sum.

[grftube]

Regardless of having an advisor or not, people use DCA because is like an insurance against a crash immediately after you start investing. Statistically speaking is very unlikely that you will start investing at the peak of a bubble like the one in 2007, but such an event is too much to swallow. So, you “pay” the cost of the insurance by using DCA and in exchange you get peace of mind, there´s nothing wrong with that. It´s like a fire insurance: everybody pays it even though the probability of a fire is extremely low.
In that sense, DCA does it job!
Additionally, if you invest what you can save from your salary, you don´t have any other choice but use DCA.

[sdot]

DCA is the best option in high volatility markets.

[PluggStarz]

Just dca BITCOIN since today and you will be fine

[cowie]

One main reason I see for dollar cost averaging, is that you simply dont have the money, but have a steady income, so allows you to invest monthly.

[rosskline]

Thanks for the explanation. A bit of clarification though... the purpose of the concept isn't to decide whether or not to invest a lump sum or spread it out, but rather to help clients understand the benefits of volatility. Clients tend to desire stable investments because of the reduced stress, but it's volatility paired with the power of dollar cost averaging that adds up to much better returns.

[CommandoX]

A side risk of lump-sum investing can rest upon the odds of life's happening: Say you place a huge amount of your money into the market, the latter tanks, and suddenly an emergent personal expense arises (one that exceeds the capacity of your emergency fund). In such scenario, dollar-cost averaging would favor your benefit.

[hanishag]

True, for the vast majority of the time, DCA results in lower returns over the long run, but if one happens to start investing for the first time either just before a crash or as a crash begins then DCA would not only help in the short term it will also help in the long term than if you had invested as a lump sum.

[canefan]

Lump sum works great if you get in at the right time. Do other tests than 1977

[healthiswealth]

why did you say it doesn't work then go on to show us it does work? ok you may get a bit less on your returns but it is by no means a failed investment.

[tripillthreat]

My take is that, as you say, “more often than not, ” a lump sum will work out moderately better than DCA. But every once in a while (like shortly before the market takes a significant downturn) DCA works out significantly better than a lump-sum investment. So the state of the market relative to past performance might influence whether I did one or the other.

[pedroteixeira]

I'm a bit confused about the concepts in this video. It makes sense in the scenario when one has an initial sum lump to invest that is different from the regular amount you'll be able to inject. Let's say you do not have an inheritance (as with your example), and you are starting with the 100$ which is the only amount you can set aside from your regular monthly income - Wouldn't be best to start with the dollar cost avg approach immediately with the 100$ per month in order to benefit from compound interest?