Part 3/8:
Dollar Cost Averaging: Appealing Yet Suboptimal
Dollar cost averaging is often touted as a wise approach. The rationale is simple: when stock prices are high, you purchase fewer shares, and when prices dip, you buy more. While mathematically sound, numerous studies indicate that DCA is generally a sub-optimal investment strategy.
One of the strongest driving forces behind DCA’s popularity stems from its behavioral benefits. As noted by behavioral economist Meir Statman, DCA can minimize regret by spreading out investment and reducing the psychological impact of potential market downturns right after a lump sum investment.