The myth that won’t die
Why dollar cost averaging doesn't work
Dollar cost averaging (DCA) - where investors buy shares in equal amounts over a period of time - is a popular investment strategy. By drip feeding, rather than committing a lump sum, investors can buy progressively more shares after prices have fallen and fewer after prices have risen. This gives investors a lower overall cost for the shares they purchase. But does it really work? Previous academic research has shown that DCA is an inefficient strategy: investors actually achieve a better risk/return trade-off if they invest their available funds immediately. Academics have subsequently struggled to explain why DCA nevertheless remains so popular. In this week's Cass Talks, Simon Hayley draws on his new paper, 'Dollar Cost Averaging - The Role Of Cognitive Error', to explain why the myth won't die.