Dollar-Cost Averaging (DCA) is a popular investment strategy that is often recommended to investors.
How does it work?
An investor invests a fixed amount of money at regular intervals, regardless of the stock price.
The goal is to reduce the impact of volatility. DCA style of investing can potentially lower the average cost per share over time.
However, is DCA is the best way to buy stocks? Let’s explore.
This article is written by a Financial Horse Contributor.
Advantages of DCA
DCA helps to reduce emotional decision making when it comes to stockis.
Since DCA involves automatic, regular purchases, it helps investors avoid the temptation to time the market or make emotional investment decisions based on market fluctuations.
DCA smoothens out the effects of market volatility, which can reduce the risk of investing a large lump sum during a market peak.
It encourages a long-term, disciplined investment approach, making it easier for individuals to stick with their investment plans.
While there aren’t many high-profile investors publicly credited with making fortunes solely through DCA, the strategy has shown consistent success for ordinary investors over long periods of time.
S&P 500 Historical Success (Over Time)
One of the best illustrations of the success of DCA comes from the performance of the S&P 500. Historically, the S&P 500 has averaged around 8-10% annualized returns over long periods (after inflation).
Example: An investor who regularly contributed $500 per month to an S&P 500 index fund from 1980 to 2020 would have experienced massive growth, especially due to compounding returns. Even through market crashes like the dot-com bubble, the 2008 financial crisis, and COVID-19 pandemic, the long-term growth trend would have allowed them to accumulate significant wealth.
DCA is also the backbone of most retirement savings