The Hidden Cost In Dollar-Cost Averaging
Why You Might Prefer LSI Over DCA
Last week, we (and by “we,” I mostly mean my sharp co-author Milan) published a piece on why “buying the dip” isn’t always the sacred mantra it’s made out to be. There are, after all, different flavors of being contrarian — that is, going against the crowd — and each flavor has its own unique implications for how you behave in the market.
This week, I want to go a little deeper and talk about the next step: the buying itself.
If you’ve been dipping your toes into investing advice, you’ve probably already heard the standard line: Dollar-Cost Averaging is the best strategy for everyday investors like you and me. It’s praised as the sensible, disciplined approach — “just keep buying little pieces of your portfolio every month, rain or shine.”
But here’s the thing: I’m here to (partially) debunk that myth. More importantly, I want to pose the question that matters most:
Should you always blindly follow the DCA strategy?
It’s tempting to think there’s one universal answer — one strategy that works for everyone, in every market condition. But investing is rarely that simple.
So, go ahead and grab a coffee — I will too — and let’s take a thoughtful look at when DCA deserves its place in your toolkit… and when you might want to rethink it.
DCA Or LSI?
The difference between Dollar-Cost Averaging (DCA) and Lump Sum Investing (LSI) is pretty straightforward:
LSI: You buy into the market all at once, putting your entire investment to work right away.
DCA: You spread your buying across different points in time, investing smaller amounts regularly (say, each month) no matter what’s happening in the market.
Simple enough. But here’s where things get interesting…
Returns
Let’s look at how these two strategies perform over time.
I’m not pulling numbers out of thin air here (or running my own back-of-the-napkin calculations) — we’ll lean on academic research, since this topic has been a favorite playground for finance professors and data crunchers for decades. I’ve linked some key papers at the end of the article for those who want to nerd out further.
So, what’s the verdict?
Quite unanimously: LSI wins.
Wait… what?
Yes, really. One notable paper found that Lump Sum Investing outperformed Dollar-Cost Averaging by an average of 0.38% per year — and that’s over nearly 100 years of historical data.
“Hmm, that doesn’t sound like much,” you might be thinking.
But here’s the kicker: over a 25-year period, that tiny annual edge adds up to about 10% more total return — just from investing all at once rather than spreading it out. In other words, choosing DCA over LSI could cost you roughly 10% in returns over a quarter-century. Not exactly pocket change.
Why does LSI come out ahead?
It all comes down to something called the equity risk premium.
The equity risk premium is the extra return investors expect to earn from investing in stocks (equities) over safer, “risk-free” assets like cash or government bonds. Stocks are riskier, but over the long term, they’ve historically delivered higher returns as a reward for that extra risk.
When you use DCA, a chunk of your money stays parked in cash while you wait to deploy it into the market. That cash earns little to nothing — it’s safe, but it’s not working for you.
With LSI, by contrast, your entire investment is put to work immediately, 100% exposed to equities. More risk, yes — but historically, more reward.
In fact, the “protection” you get from holding back and dripping money in slowly through DCA only partially offsets the higher returns you miss out on by not being fully invested from the start. Slight reduction in risk… but a big miss on potential gains.
Now, there’s an important nuance to keep in mind…
All the results we’ve discussed so far come from long-term averages — but when you zoom in on periods of high volatility (when markets are especially jumpy) or during bear markets (extended periods of falling prices), the picture gets much less clear.
The one paper I referenced earlier still found a slight edge for Lump Sum Investing (LSI) in these rougher periods — but the margin shrinks dramatically, down to just 0.09% per year. That’s barely a blip compared to the long-term averages we saw before.
In fact, other studies sometimes show a slight advantage for Dollar-Cost Averaging (DCA) in these tough market environments, depending on the time periods and the methods used to measure performance.
Why? Simple: the risk you take by going all-in with LSI tends to materialize in bad markets. When stocks tumble, the advantage of being fully invested disappears — and the protective, gradual approach of DCA can actually reduce your losses. In those cases, DCA doesn’t necessarily deliver big gains, but it can offer a better (or at least less painful) relative outcome.
Before you go all-in tomorrow morning, another word of caution:
These results only hold over mid- to long-term periods.
Trying to lump-sum invest over a short window — say, a week or a month — is basically gambling. Markets can swing wildly in the short run, and the risk of catching a sudden downturn is very real. But over decades, history has favored the fully invested.
So, we’ve established that in terms of pure returns, Lump Sum Investing (LSI) tends to have the edge over Dollar-Cost Averaging (DCA). But — as anyone who’s spent even a little time around financial markets knows — returns aren’t the only player on the field.
Risk
In finance, the key question isn’t just how much return you can earn, but rather:
“How much bang can I expect for every buck I put at risk?”
In other words, what’s the balance between the potential reward and the risks you’re taking to chase it?
When we bring risk into the picture, the story between LSI and DCA starts to shift.
One study found that when you use DCA, the chance of experiencing a major loss — say, a drop of 20% or more — drops significantly compared to going all-in with LSI.
Not only that, but the time you spend “underwater” (meaning, your portfolio is worth less than what you originally put in) tends to be shorter with DCA, especially in the early years. Why? Because with DCA, you’re easing into the market gradually, and your portfolio’s volatility — the size of its ups and downs — stays lower when you’re still close to your starting capital.
The Character Of The Investor
Another interesting piece of research looked at the role of risk aversion — that is, how sensitive an investor is to risk when making decisions.
Some people are naturally more risk-averse: they prefer to avoid big losses, even if it means accepting slightly lower returns. Others are more risk-tolerant (sometimes called “risk-seeking”): they’re willing to stomach the ups and downs in exchange for the chance at higher gains.
When this study factored in different levels of risk aversion, it found something striking:
For risk-averse investors, DCA might actually deliver a better risk-return trade-off. The smoother, less volatile path of DCA can make more sense for those who value stability and are cautious about market swings.
On the flip side, if you’re a risk-tolerant investor, the balance tips in favor of LSI — since the potential for higher returns outweighs the added volatility you’re willing to accept.
So, what’s the takeaway here?
There’s no universal “best” strategy that fits everyone. Whether DCA or LSI makes more sense depends not just on cold, hard numbers — but also on your personal investing style, your tolerance for risk, and maybe even your broader life philosophy.
Of course, there are other factors at play here too…
Practical Problems
Now, here’s something important to recognize:
A lot of investors prefer Dollar-Cost Averaging (DCA) simply because Lump Sum Investing (LSI) isn’t really an option for them.
Think about it — most of us don’t have a giant pile of cash just sitting around, waiting to be invested. Instead, we receive income at regular intervals: paychecks every month, maybe a quarterly bonus, or occasional dividends. Naturally, we invest as that money comes in — which, by definition, leads us to DCA.
But there are moments when LSI becomes a real option worth considering.
For example, maybe you get a year-end bonus at work. Or a generous gift from family. Or — hey, we can dream — you hit the jackpot and win the lottery.
Even beyond windfalls, some of you might currently be splitting up the money you do have into multiple small buys, simply because you’re uncertain about what the market will do next week. You hesitate, holding some cash on the sidelines, thinking you’ll wait for “the right moment.”
In those cases, you might want to reconsider — and explore whether putting that money to work all at once (a kind of mini-LSI) could actually serve you better.
Because remember: while DCA can help manage emotional and short-term risks, it’s not automatically the mathematically superior strategy — especially over long time horizons.
Closing Remarks
Let’s bust a common myth right here: Dollar-Cost Averaging (DCA) is not automatically the “best” strategy for every investor, in every situation.
Sure, it’s often praised as the safe, disciplined approach — and for good reason. It can help manage risk and reduce the emotional rollercoaster that comes with trying to time the market. But when it comes to maximizing long-term returns, the data consistently shows that Lump Sum Investing (LSI) often pulls ahead.
So, how do you decide?
It really comes down to knowing yourself as an investor.
If you’re someone who can stomach more volatility — the ups and downs, the occasional gut-wrenching market dip — then LSI might be the better fit for you, offering the potential for higher long-term returns.
On the other hand, if you’re more risk-averse and the idea of watching your portfolio swing wildly makes you lose sleep, DCA might be your best bet. Yes, you’ll likely pay a small “DCA fee” in the form of slightly lower returns, but in exchange, you avoid the sharpest market jolts and ease your way in more calmly.
There’s no universal right or wrong — only the strategy that aligns best with you.
Another thing to consider: you don’t have to stick purely to LSI or DCA. Many investors create hybrid strategies that blend both. For example, you might put part of your lump sum into the market right away (taking advantage of time in the market) and then dollar-cost average the rest over several months.
By doing this, you create a risk and return profile that lands somewhere between the two extremes we’ve discussed: you capture some of the upside of LSI while softening the emotional and financial shocks with DCA.
I’ll leave you with this to think about: if you won the lottery tomorrow, would you boldly invest it all at once — or would you choose to ease your way into the market, step by step?
📢 What would you do? We’d love to hear your take!
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Please note: This article includes a disclaimer regarding investment advice.
References
Cho, D. D., & Kuvvet, E. (2015). Dollar-cost averaging: The trade-off between risk and return. Journal of Financial Planning, 28(10), 52–58.
Felix, B. (2020). Dollar cost averaging vs. lump sum investing. Ottawa, ON: PWL Capital Inc.
Trainor, W. J. (2005). Within-horizon exposure to loss for dollar-cost averaging and lump-sum investing. Financial Services Review, 14(4), 319–330.
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Really appreciate this close look at lump sum vs dollar cost averaging. an interesting question. if you have lump sums, that is. no given for most retail investors. i also wonder if some middle way is best. averaging down when the initial investment falls and then leaving it be when it's rising. in any case, thanks.