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Steady contributions make investing ‘more palatable’
One of the main benefits of dollar cost averaging: It takes emotion out of investing.
“Doing a little over time averages out the good days and the bad days [in the market] and make it a more enjoyable experience for you,” said Sean Deviney, a certified financial planner based in Fort Lauderdale, Florida.
Feeling can be a malicious force for investors. For example, the fear of losing money can trigger harmful behavior like trying to time the market, like guessing the best time to buy and sell.
Unfortunately, those efforts “often backfire,” according to Finra.
The regulator said people often sell out of fear when stocks fall in value, and then miss out on the opportunity to make a potential profit when the stock recovers. For example, the S&P 500 The stock index lost almost 20% last year, showing the worst since 2008. Investors who sold out missed out on a gain of about 12% through 2023.
Conversely, people can rush in when the stock is going up — and buy right before the stock is about to drop.
There are all kinds of reasons to worry these days, like the war going on in Ukraine and potential recession on the horizon.
“There will always be a reason not to invest,” said Deviney, director of Provenance Wealth Advisors. “If you’re always looking for excuses not to invest, you’re missing out on long-term wealth accumulation. Dollar-cost averaging makes that a bit easier.”
This strategy can also help reduce regret. Investing smaller amounts in small amounts makes it easier to accept an investment at the wrong time, according to for Charles Schwab.
When a one-time investment makes sense
However, dollar-cost averaging is not always the best move or necessarily right for everyone.
According to Finra, investors who can withstand the urge to sell during tough times can realize higher long-term returns by investing a sum of money rather than breaking it down. This assumes that the investor is holding that money in the form of cash, which typically yields lower returns than stocks over time.
Dollar-cost averaging can also mean additional fees for investors if they incur costs per transaction, Finra said.
