This entire blog could be summarized in two sentences: ‘Dollar-cost averaging (DCA) is an effective strategy for long-term investors. It is a simple yet powerful approach: invest a fixed amount at regular intervals, regardless of market conditions.’
Frankly, I never felt the need to write this post as I assumed most are intimately familiar with the concept - some know DCA as recurring investments, others know it as SIPs (Systematic Investment Plans). But a recent check-in made it empirically clear to me that many struggle practicing it. Over the last month, U.S. equities have seen a slight correction, while bonds and emerging markets (China specifically) have outperformed. Yet, 3 out of 5 high-risk investors hesitate to continue investing and want the volatility to cool off. Hearing this, I decided to do a full post explaining DCA.
What is Dollar-Cost Averaging?
Instead of attempting to time the market, investors allocate capital consistently over time, accumulating shares at both highs and lows.
For example, an investor committing $1,000 per month to a collection of tech stocks:
- When prices are high, fewer shares are acquired.
- When prices are low, more shares are acquired.
Mathematically, this leads to an average cost per share that is lower than making a single lump-sum investment at an inopportune time.
Why DCA works in volatile markets
No more timing-risk
Most investors - retail or professional - struggle to predict market tops and bottoms consistently. DCA eliminates the need for precision, ensuring continued market participation. This is especially useful if you’re allocating to passive strategies.
Turns volatility into an advantage
Market fluctuations are inevitable, particularly in high-growth sectors like technology. DCA enables investors to accumulate more shares during downturns, improving long-term returns.
Reduces emotional bias
Investors often buy into rising markets out of a Fear Of Missing Out (FOMO) and hesitate during downturns due to a Fear Of Further Losses (FOFL?) DCA brings discipline to investing, ensuring you’re well poised for the long term.
DCA in the context of U.S. Technology stocks today
Recent corrections in technology stocks, particularly following DeepSeek’s announcement, are another reminder that even strong sectors experience drawdowns. These are often opportunities, not signals to pause investments.
- In 2020, the Nasdaq fell over 30% before rallying to all-time highs.
- In 2022, technology stocks experienced a sharp correction, only to recover in 2023.
- Today, AI-driven stocks have surged, followed by expected consolidation.
A sub-optimal decision in 2020 and 2022 was to stop investing.
Where DCA works best
DCA works particularly well for broad market indices (S&P 500, Nasdaq), sectoral growth themes (AI, clean energy), and collections of stocks. It is not as commonly applied to individual stocks or niche opportunities, where valuation and fundamentals play a larger role. It is optimal to DCA into diversified investment-portfolios, where each asset class is uncorrelated. You get in on the ups-and-downs of each holding at different points in time.
Here’s Jack Bogle, the founder of Vanguard, explaining why DCA is important:
Final thought
DCA is great. But make sure the portfolio you’re averaging into aligns with your risk tolerance. DCA only works if you can stay invested - no point if the market uncertainty keeps you up at night.
