In our post on Diversification and our recent 60/40 vs S&P 500 analysis, we explored how different types of portfolios behave and why a smoother, disciplined approach helps real investors stay invested.
Now that we understand why we invest and the role of diversification, it is time to tackle the next question: How should you enter the market?
If trying to pick the “perfect day” to invest keeps you on the sidelines, there is a simple strategy used by professionals and beginners alike: Dollar-Cost Averaging.
What Is Dollar-Cost Averaging?
Dollar-Cost Averaging (DCA) is an investing strategy where you invest the same amount of money at regular intervals, regardless of whether markets are rising or falling.
If you automatically invest 500 dollars into an ETF on the 1st of every month, you are already using DCA:
- When prices are high, your 500 dollars buys fewer units.
- When prices are low, the same 500 dollars buys more units.
Over time, this smooths out your average purchase price without requiring timing decisions or market forecasts. Vanguard notes that DCA helps reduce regret and lowers the emotional barrier to entering the market. (Source: Vanguard)
A Simple Example
Imagine you want to invest 5,000 dollars into a broad ETF.
Option 1. Lump Sum:
- You invest the full 5,000 dollars at 20 dollars per unit.
- You receive 250 units.
Option 2. Dollar-Cost Averaging:
- You invest 1,000 dollars every month for 5 months.
- ETF prices: 20, 21, 18, 19, 21.
Your 1,000 dollar monthly contributions buy:
- 50.0 units at 20
- 47.6 units at 21
- 55.6 units at 18
- 52.6 units at 19
- 47.6 units at 21
Total: 253.4 units.
You ended up with more units because your rule forced you to buy extra during temporary dips. No timing skills required. PWL Capital highlights this as a key behavioural advantage of DCA. (Source: PWL Capital)
Why DCA Helps Real Investors
Dollar-Cost Averaging is less about maximising return and more about supporting good behaviour. It helps beginners in three key ways:
- Reduces timing anxiety. You stop trying to guess the best entry day.
- Builds consistency. Investing becomes part of your monthly routine.
- Keeps you in the market during scary headlines. The plan continues regardless of volatility.
Morgan Stanley notes that DCA removes emotion from the investment process and helps investors stay committed through market swings. (Source: Morgan Stanley)
DCA vs Lump Sum: What History Shows
Here is the honest tradeoff.
When markets rise over time, lump-sum investing usually wins mathematically:
- Across decades of U.S. and global market data, lump sum outperforms DCA in about 60 to 70 percent of periods.
- The performance gap is usually modest, often a few percentage points after the first year.
This is intuitive. Markets tend to rise more often than they fall, so investing earlier has a statistical advantage.
However, Northwestern Mutual and RBC show that many investors delay investing because they fear making a large deposit at the wrong time. DCA solves that behavioural hurdle by giving them a structured entry path. (Sources: Northwestern Mutual, RBC GAM)
When DCA Shines
1. When You Feel Nervous About a Large Deposit
DCA gives you a structured, comfortable way to enter the market without feeling exposed to volatility.
2. When You Invest From Income
Because salary arrives periodically, most people naturally invest with a DCA pattern through accounts like RRSPs, 401(k)s, TFSAs, ISAs, and more.
3. When You Happen to Start Near a Market Peak
Investors who went all in at the peaks of 2000 or 2007 experienced sharp immediate losses. Those who averaged in saw smaller drawdowns and accumulated more units at cheaper prices. DCA softens the emotional impact of unlucky timing.
Volatility, Drawdowns, and the Emotional Journey
Dollar-Cost Averaging changes how your portfolio feels, especially early on:
- Lower volatility while ramping in. Some of your money stays in cash during the transition period.
- Shallower early drawdowns. Only early instalments take the full hit if markets fall.
- Faster psychological recovery. Your average entry price lands near the middle of the range, which often feels more stable.
Behaviour researchers like Dan Ariely note that people tolerate small repeated risks far better than one large, irreversible decision. DCA aligns with this natural behaviour pattern.
How to Start Dollar-Cost Averaging with ETFs
Step 1. Pick One or Two Core ETFs
Broad, low-cost ETFs make ideal building blocks:
- U.S. stocks: SPY, VOO
- Global stocks: VT
- UCITS global developed markets: SWDA, VWRL
Step 2. Choose a Schedule
Monthly or biweekly both work. Consistency matters far more than frequency.
Step 3. Automate Your Plan
Depending on your region, platforms support:
- Recurring transfers
- Recurring ETF purchases
- Fractional shares
Step 4. Keep the Rule Simple
For example:
“On the 3rd of every month, invest 500 dollars into my chosen global ETF. Review only once a year unless my situation changes.”
Pros and Cons of Dollar Cost Averaging
The Benefits
- Easier for beginners who fear bad timing
- Fits naturally with salary-based investing
- Reduces regret when markets fall early
- Encourages disciplined long-term behaviour
- Smooths early volatility
The Limitations
- Lower expected return than lump sum in rising markets
- High commissions can reduce efficiency
- Does not replace proper diversification
- May be slower than necessary for investors with strong risk tolerance
DCA Around the World
The mechanics stay the same globally. Only the platforms and products differ.
- United States: SPY, VOO, VT via IRAs, taxable accounts, automated 401(k) plans.
- Canada: RRSP and TFSA contributions into Canadian or U.S. ETFs.
- UK and Europe: Monthly savings plans into UCITS ETFs like SWDA and VWRL.
- GCC and UAE: International brokerages offering UCITS ETFs on European exchanges.
Where DCA Fits in Your Investing 101 Map
Think of your investing journey in layers:
- Investing 101 explains why starting early matters.
- Diversification shows how to build a sensible portfolio.
- ETFs give you the simple tools to implement that plan.
- Dollar-Cost Averaging is the system that moves your money into the plan consistently.
DCA does not design your portfolio. It powers it. Once the structure is set, your job becomes simple: stay consistent and let compounding work over time.
Sources: Vanguard, PWL Capital, Morgan Stanley, Northwestern Mutual, RBC Global Asset Management, Forbes, Heritage Investments, ScienceDirect.
Disclaimer:
The content on this blog (“Zorroh”) is provided for general informational and educational purposes only. It is not intended as investment, financial, tax, legal, or other professional advice. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. Always conduct your own research or consult a qualified professional before making investment decisions.