The Benefits of Dollar Cost Averaging in Stock Market Investments

Dollar cost averaging is a strategy to manage price risk when you're buying stocks, exchange-traded funds (ETFs) or mutual funds. Instead of trying to time the market and predict when prices will be at their lowest, you invest a fixed amount of money at regular intervals. This approach can help smooth out the impact of market volatility on your overall investment portfolio.

Two investing practices that seek to counter the natural inclination toward market timing include dollar cost averaging (DCA) and value averaging (VA). DCA involves investing a fixed amount of money at regular intervals, regardless of market conditions. VA, on the other hand, involves adjusting the amount invested to maintain a target rate of return.

Financial advisors tend to recommend dollar-cost averaging, and they say it can especially make sense in a frothy market like the current one where nothing is certain. Dollar-cost averaging is a more conservative approach to the age-old advice that investors should buy when share prices are low and re-sell them when they've appreciated in value.

Most physicians receive a regular paycheck, and sometimes receive a lump sum such as a bonus. A proportion of both should be invested. Suzy is excited to deploy her first corporate bonus but scared to invest everything in a lump sum. Should she stick with what's worked in the past or consider trying a new strategy like dollar cost averaging?

My favorite is to consider dollar-cost averaging, so this is when you invest regularly at a specific interval because that means you get to catch the market. So, in essence, there is merit to dollar cost averaging. However, it's uncertain when the next bear market will occur, and on average, you would be better off investing a lump sum. El Salvador started buying bitcoin every day less than a week after FTX collapsed in November 2022. That was the cycle bottom.