Free for 90 days: Sign up now and get 90 days managed free after your first deposit. See offer details

<title>Dismiss</title>
Managing Your Money

Should I Dollar-Cost Average Into The Market?

The correct answer depends on what most makes you comfortable with getting invested.

Articles by Dan Egan

By Dan Egan
Managing Director of Behavioral Finance & Investing, Betterment  |  Published: January 29, 2013

Odds are that dollar-cost averaging won't improve returns.

Indirect dollar-cost averaging as you get paid is ok though—your money goes into the market as soon as it can.

But if dollar-cost averaging makes you comfortable, it's better to do it than sit on cash.

First, let’s get some definitions out of the way. Dollar-cost averaging (DCA) refers to an investment strategy of investing a fixed amount of money over a time period (say 1 year). There are two types of DCA:

  • Voluntary DCA implies you have a liquid amount of cash to invest, but are intentionally parceling it out over time. The cash will (you hope) be earning interest while it’s not invested.
  • Involuntary DCA generally refers to auto-deposits set up to invest as you earn money. Your purchase points are at different points, but you did not have any period of sitting in cash.

The big difference between these two is how long you were sitting on cash, rather than investing it in a portfolio. Involuntary DCA implies that you could not have invested sooner, while voluntary DCA is an investment strategy where you could have, but chose not to.

Should I dollar-cost into the market?

Ok, gimme the answer already smartypants!

From a purely unemotional investment strategy perspective, because the expected total return of markets is positive, it makes sense to invest immediately, and not worry about timing the market. It’s important to remember that while the price of stocks may go up or down, they are usually paying about 2% in dividends. Thus your price return can be flat, but your total return (price return + dividend return) is still up. So if you wait, you’ll probably have a lower total return, though not by a large amount.

Sidenote: One valid investment strategy reason to practice dollar-cost averaging is because you have a weak view that the market will be going down in the near/short-term. Otherwise, it’s best to just invest the money, and not worry about timing it.

However, there are some very nice psychological benefits to dollar-cost averaging:

  • it diversifies your purchase price, which makes you less susceptible to the Disposition Effect
  • it likewise reduces your anxiety that you have bought “at the top”, and thus makes you less disposed to attempt market-timing and pull out after being invested.
  • it gives you a concrete plan for moving out of cash. The move from “safe” to “higher risk/return” is an uncomfortable one, and often people want to feel that they’re doing it in a controlled manner. Having a clear plan to do it over a period of time is better than not doing it at all.

With those points in mind, it actually can be more rational to voluntarily dollar-cost average. After all, it’s better to invest slower and more comfortably, than never invest at all.

Recommended Content

View All Resources
Forget Your Resolution. Ask Yourself How You’ll Fail in 2019 Instead

Forget Your Resolution. Ask Yourself How You’ll Fail in 2019 Instead

Instead of setting a New Year’s resolution, try taking a different approach. Try considering what you could do to destroy your resolution in order to help reveal potential pitfalls so you can safeguard against them.

How Banks Fail in Helping You Save Money

How Banks Fail in Helping You Save Money

You may not realize it, but our financial lives are shaped by a great divide: banking vs. investment managers. In between lies most people’s pinnacle challenge: saving for the future.

Frequently Asked Questions about Betterment

Frequently Asked Questions about Betterment

Just starting out exploring Betterment? These are the frequently asked questions that help people find their way.

Explore your first goal

Safety Net

This is a great place to start—an emergency fund for life's unplanned hiccups. A safety net is a conservative portfolio.

Retirement

Whether it's a long way off or just around the corner, we'll help you save for the retirement you deserve.

General Investing

If you want to invest and build wealth over time, then this is the goal for you. This is an excellent goal type for unknown future needs or money you plan to pass to future generations.

Smart Saver

You could earn 20X more than a typical savings account with our low-risk investing account for your extra cash.

<title>Close</title>

Search our site

For more information and disclosures about the Betterment Resource Center, click here. | See our contributors.