Dollar-cost-averaging (DCA) refers to the investing strategy whereby an investor puts in a fixed-dollar amount into an investment at regular intervals. The idea is that with a fixed-dollar amount, the number of shares bought will be higher when the share price is low, and lower when the price is share price is high; which on average will produce a “lower cost per share” outcome.
The paper “Mathematical Illusion: Why Dollar-Cost Averaging Does Not Work“, in the FPA journal, argues however that:
Absent any benefit from stock price volatility in reducing average cost, the performance of DCA rests on the trend in stock prices, with DCA outperforming in downward markets and lump sum outperforming in upward markets. Since the latter case is the norm over time, customary empirical findings in the finance literature of underperformance by DCA are explained.
The theory in this paper is confirmed by examining a broad sample of stocks, contrasted over the high-growth trend in the second half of the 1990s against the general market malaise over the following half-decade. In the absence of this trend, DCA and lump sum provide equivalent results.
In other words, this paper argues that statistically, there is no advantage whatsoever in practising DCA. The benefits of using DCA, if any, are purely of a psychological appeal.
Note: The context of DCA here refers to an investor with a lump-sum amount to invest, but instead chooses to practise DCA. This is quite different from the case whereby an investor make regular contributions (by necessity) to his/her investment accounts from the paycheck.