Dollar-cost average could be the right investment strategy, provided you have the correct characteristics. DCA is most suitable for first-time investors who have little investing experience, and investors who are concerned about mistiming their entry into the market. Additionally, if you’re able to make regularly timed investments with a fixed amount of money, such as a 401(k) or IRA, you could benefit from using DCA. If you have a low appetite for risk, but want to diversify the price at which you acquire shares (in other words, purchasing more shares when prices are low and fewer shares when prices are high) you should consider DCA . Finally, if you don’t want to be bothered about when to make an investment, you can benefit by automating DCA.
Dollar-cost average may not be suitable if you’re concerned about being left behind in a rising market, because it requires regularly timed investments with a fixed amount of money. If you have a lump sum of cash that can be immediately invested and are comfortable with your asset allocation decision, then DCA may not be the best approach. You may also find DCA unsuitable if you want to take a more active approach to investing and are prepared to watch the market. This requires you to decide when to enter the market. DCA on the other hand is a passive investment strategy that does not require you to judge the best entry point.
Dollar-cost average is not without hazards, however. Risks can range from owning fractional shares to having more money left in cash in your account than you intended. If your broker does not allow fractional share ownership, then not all the cash you’ve allocated will be invested during each investment period. DCA requires regular investing to be successful, so there is also the risk that returns could be lower than anticipated if trading and brokerage costs are high.
Fees can also add up quickly if trading is conducted too frequently. Applying DCA allows investors be fully invested in the market without the worry of market timing. You can expect DCA to diversify the price at which shares are acquired over an extended period of time. Investors should not expect immediate short-term gains from applying DCA. This is potentially a “get rich slowly” approach designed to be implemented over a long-term (10-20 year) investment horizon. Investors should be aware of these risks when applying this investment strategy.