Steady wins: dollar-cost averaging and time in the market
Why investing regularly and staying put usually beats trying to outsmart the market.
Dollar-cost averaging
Dollar-cost averaging (DCA) means investing a fixed amount on a regular schedule, like $200 every month, no matter what prices are doing. When prices are low, your $200 buys more shares; when they're high, it buys fewer.
Many people already do this through workplace retirement plans that invest part of every paycheck. Its biggest benefit is behavioural: you don't have to decide when to invest, so fear and excitement have less say.
An honest comparison
If you already have a lump sum, studies of past market data have found that investing it all at once has more often come out ahead than spreading it out, simply because markets have risen more often than they've fallen. DCA trades some expected return for less regret if prices drop right after you invest. Both are reasonable; neither is guaranteed.
Time in the market vs timing it
Market timing means trying to jump out before drops and back in before rises. It sounds clever, but you have to be right twice: when to get out and when to get back in. Many of the market's best days have come close to its worst days, often during scary periods when it feels safest to be out. Missing even a handful of those best days can noticeably lower long-run returns.
Staying invested through the ups and downs, with money you won't need soon, has historically been a more reliable approach than trying to predict them.
You invest $100 a month for three months. The fund's price is $10, then $5, then $10.
Month 1: 10 shares. Month 2: 20 shares. Month 3: 10 shares. Total: 40 shares for $300, an average cost of $7.50 per share.
The average price over those months was about $8.33, but your average cost was lower, because your fixed amount bought more when the price was low. At $10, your 40 shares are worth $400.
Key terms
- Dollar-cost averaging
- Investing a fixed amount at regular intervals regardless of price.
- Lump sum investing
- Investing a large amount all at once.
- Market timing
- Trying to buy and sell based on predictions of short-term market moves.
A steady habit and patience beat trying to guess the market's next move.