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Dollar-Cost Averaging: Does It Work?

May 01, 2017 3:03 PM ETAAPL, LC, AGG, SPY13 Comments
Emmanuel Marot profile picture
Emmanuel Marot


  • Dollar-cost averaging is a well-know method to reduce risk.
  • But it also decreases average returns. Hence some investors praising it, and others saying it's nonsense.
  • There are many anecdotal illustrations one way or another, but nothing truly conclusive.
  • This large-scale statistical study aims to give definitive answers about the effectiveness of dollar-cost averaging.


Dollar-Cost Averaging is buying stocks in smaller, constant chunks of money over time, as opposed to buying all the stocks at once. By spreading stock purchases over time, one is less likely to buy stocks at their peak. Conversely, it would allow buying stocks at a lower price after a market's retrenchment.

There has been countless explanations, examples and analysis about dollar-cost averaging. Unfortunately, most, if not all of them are purely anecdotal, which can mislead investors on if dollar-cost averaging is an appropriate strategy for their portfolio, and if it is, the best way to apply the strategy. This is an attempt give readers a broader and more analytical answer.

How dollar-cost average works

It is worth noting that dollar-cost averaging is purely a lagging decision. If someone gets $500 to invest in the stock market every month, no more, no less, and uses them to buy the S&P 500 (SPY) as fast as he can, he's not really following a dollar-averaging "strategy". The dollar-averaging strategy is only applicable when one has, say, $100,000 to invest in the stock market right now, but decides to invest only a portion of the entire sum.

Here's an example of how dollar-cost averaging can lower risk. Let's compare investing $100,000 in SPY at $147.24 on September 14th, 2012, versus investing $25,000 per week for four consecutive weeks, and compare the overall performance of the fifth week.

In the first case, if we buy everything at once our cost per share is $147.24. With dollar-cost averaging, it's an average of the prices of the first four weeks: ($147.24 + $145.89 + $143.93 + $146.13 )/4 = $145.80. The stock price on the fifth week is $142.84, which means that by investing everything at once we would have lost almost $3,000, but we would have only lost $2,000 by using dollar-cost averaging.

This article was written by

Emmanuel Marot profile picture
Emmanuel Marot graduated from leading French Business School ESCP with a major in Computational Finance and a MBA exchange from the University of Washington. He previously co-founded and managed three startups, all in the Internet field, and all with successful exits; the last one being a mobile search engine that served a billion queries in over 10 countries and was subsequently sold to Microsoft Corp. An ‘accidental quant’, Emmanuel now focuses on merging sound mathematical principles with his Internet data mining experience to create new stock market investment strategies.

Analyst’s Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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