Dollar Cost Averaging (DCA) refers to two different investment strategies, one of which is hardcore and one of which is not hardcore.
Sometimes when people say DCA, they’re talking about regularly investing a set amount into the market every two weeks or every month, typically automatically when they get paid.
With this approach, it doesn’t matter whether the market is up or down, you just keep investing. When things are down, you get to buy them on sale. When things are up, well, at least your portfolio is up!
This is a solid, timeless strategy that just about everyone should use when they’re building wealth.
But sometimes when people say DCA, they’re talking about investing a large sum of money into the market in small increments over time. So you find yourself with $250,000 to invest, say from an inheritance, and you invest $25,000 a month over 10 months.
This approach seems appealing because people are afraid of putting $250,000 into the market all at once and getting unlucky with the timing, like putting it all in right before the market dips.
But this is a case where you should let data decide, not your gut instincts. Many top-tier investment firms have run the numbers, and using DCA like this almost always performs worse than just putting it all in at once.
The reason is that when you leave money on the sidelines, you miss out on growth. And that missed growth almost always ends up being a larger amount than any money you’d lose by getting unlucky with the timing of the market.
Or in other words, it’s almost always better to just have the money invested. Even if it somehow feels more risky, it’s actually the safer bet.
When it comes to investing with us, we care a lot about psychology and making sure how you’re using your money aligns with your values and goals, and improves the quality of your life. We care about reducing your financial stress and increasing your peace of mind.
But we don’t let psychology lead our investment decisions, because more often than not, it’s a poor guide.
Instead we work with you to better understand the market, your own psychology, and how to go about using investment strategies that have proven to be the most effective over time.