Another Look at Dollar Cost Averaging

Abstract

Dollar cost averaging—spreading an investor’s stock purchases evenly over time—is widely touted in the popular press because of the mathematical fact that the average cost per share is less than the average price. The academic press has generally been skeptical and attributes dollar cost averaging’s popularity to investor naiveté and cognitive errors. Yet, dollar cost averaging continues to be recommended by knowledgeable investors as a sensible way to avoid ill-timed purchases. The authors argue that dollar cost averaging is, in fact, an imperfect but helpful strategy for diversifying investment decisions across time.

TOPICS: Security analysis and valuation, equity portfolio management