So How Bad is Dollar-Cost Averaging? My Own Study of VFINX from 1988 – 2007

First of all, I am a believer of dollar-cost-averaging (DCA) and have been taking this approach ($100 every month) ever since I started investing in mutual funds. The reasons I do DCA are, 1) conventional wisdom tells me that by spreading the investments throughout the year, I don’t have to guess when is the right time to enter as nobody really knows whether now is a high or a low; 2) since I have a dozen of funds that I invest regularly, it’s a little hard for me to put thousands of dollars right away at any time of the year. So I choose DCA and it worked quite well for me so far. However, since I have nothing to compare with, I don’t know how good my investments are or if I could have done any better by taking another approach: invest $1,200 at the beginning of the year (lump-sum) into each found and forget about it till next January.

Over the week, I read two posts on whether to DCA or lump-sum (LS) investing. Jonathan at MyMoneyBlog cited a research paper that DCA is not only a poor way to reduce risk, but also inferior in long-term return. Super Saver contributed to the full limit in IRA in January and pointed me to an article which also says LS beats DCA. All these articles/posts contradicted to what I consider a good investment strategy. So is DCA really bad for long-term investment? If so, how bad is it?

Study assumption

Without relying on what people have already side, I decided to do my own little study and find out what DCA brought me. My study subject is Vanguard S&P 500 Index fund (VFINX) and the data I used are from January 4, 1988 to January 3, 2007 obtained from Yahoo! Finance. The earliest data Yahoo can provide is from March 1987. Since that’s a partial year, I go for the next full year which is 1988. For my study, all dividends are reinvested and I have four different investment schemes:

  • Invest every month with $100
  • Invest every quarter with $300
  • Invest every 6 months with $600
  • Invest every year with $1,200

this means I only want to put $1,200 every year into VFINX, but I can choose four ways to invest the money. These four plans are actually all DCA investment schemes, only different in the amount invested each time and the investment frequency. However, in my study I call the last one (1-year plan) LS plan and the rest DCA plans.

Shares owned and returns

In the first scenario, all investments start on January 4, 1988. That is, I buy $100, $300, $600, and $1,200 of VFINX with the 1-month, 3-month, 6-month, and 1-year investment plan, respectively, on January 4, 1988 and the next purchase occurs on

  • February 1, 1988 for 1-month plan
  • April 4, 1988 for 3-month plan
  • July 1, 1988 for 6-month plan
  • January 3, 1989 for 1-year plan

For this scenario, the number of shares I own over the 19 years for four different investment schemes are shown in the following plot.

And total number of shares I own and the nominal returns, which I defined as (market value – cost basis)/cost basis * 100%, on January 3, 2007 for the four investment schemes are

Scheme Shares owned Cost basis Market value Return
1-month 518.09 $22,800 $67,527.87 194.99%
3-month 521.78 $22,800 $67,737.26 197.09%
6-month 525.79 $22,800 $68,258.07 199.38%
1-year 552.53 $22,800 $71,728.99 214.60%

Clearly, in this case, a lump sum investment of $1,200 at the beginning of the year will give me the most shares and the highest market value of my investment, with 1-month DCA being the worst performer.

If, on the other hand, I don’t have $300, $600, or $1,200 on January 4, 1988, and have to save $100 every month to make that kind of lump sum investment, the picture changed completely. For this scenario, the first purchase of the 3-month, 6-month, and 1-year investment plan will be made on

  • March 1, 1988 for 3-month plan
  • June 1, 1988 for 6-month plan
  • January 3, 1989 for 1-year plan

The growth of shares I own with different plans is show in the following plot.

For this case, I made last investments for the 1-month and 1-year plan on January 3, 2007 and the performance for each plan is

Scheme Shares owned Cost basis Market value Return
1-month 518.09 $22,800 $67,527.87 194.99%
3-month 516.53 $22,800 $67,055.94 194.11%
6-month 505.35 $22,800 $65,604.43 187.74%
1-year 486.03 $22,800 $61,896.58 171.48%

Now, the 1-month plan becomes the winner and the 1-year plan is the biggest loser with the least shares on January 3, 2007. Of course, this case didn’t consider where to put that $200, $500, and $1,100 during the accumulation time (2 months, 5 months, and 11 months, respectively, for each plan) to reach the investment thresholds. The returns of the last three plans will be a little higher if the money earn interests, but the number of shares owned won’t change unless the interests are used to purchase more shares (i.e., the amount of money invested will be principle plus interests).


The main conclusion I can draw from my own study is that one should not delay investing. If you want to invest, say, $1,200 in a mutual fund in a year, you should start invest immediately. If you have $1,200 spare money to invest on the first work day of January, invest that money in lump-sum will be a better choice than spreading it out over year. If, on the other hand, you have a tight budget every money and can only invest a small amount, then DCA every month will probably work for you better than saving the money till you reach the size to make a lump-sum investment.

Of course, my study used historical data and we all know “Past performance is not guarantee of future results.” However, as long as we believe the economy will continue to growth and the general market trend is up (though there will be declines and some times last quite long) in the long run, either investment plan will give us some decent returns.

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24 Responses to “So How Bad is Dollar-Cost Averaging? My Own Study of VFINX from 1988 – 2007”

  1. Jeremy |  Jan 08, 2007 at 12:50 pm

    Very nice data and presentation. I think a lot of people just assume DCA means monthly investing. In fact, investing regularly at any interval is also DCA. So if you are buying the same amount of the same fund every year, you are still dollar cost averaging, just on a different time frame.

    The argument for doing DCA of any sort is to take emotion out of investing, plain and simple. If you do not make regular investments at predetermined intervals you are left with emotion to base your investment decisions. This leads to trying to time the market and picking optimal times to buy. Generally this leads to worse performance over someone who invests regularly.

    So while I can certainly see the argument for DCA as not being optimal as your first example showed, it is still likely far better than someone who invests irregularly based on market conditions or how much money they have on hand to invest.

  2. The Sun |  Jan 08, 2007 at 2:00 pm

    Indeed all the four schemes I considered are DCA (I modified my post after your comments), with only difference being the investment frequency and amount invested each time. While we always want to maximize our returns, the main message, as you said, is to invest regular. Over time, the market will take care of the return for us, as long as we have faith in it :D.

  3. Jonathan |  Jan 08, 2007 at 2:14 pm

    Very interesting. There will be years when the monthly scenario beats the once-a-year, but I think your data provides us another example that, in the long-run, it’s better to just get your money invested as soon as possible.

  4. Deep |  Jan 08, 2007 at 5:24 pm

    Very Interesting and informative for a person like me who is contemplating DCA. Thanks!!!!!!!!!

  5. moneymonk |  Jan 08, 2007 at 6:00 pm

    Good info for people that need a good definition of DCA. I like the way you breakdown the graphs.

    I think to each it’s own. Some invest the only way the can afford, which is so much at a time. Others invest in lump sums.

    It all depends on the Individual what is best for them.

    Overall investing little is better than none at all.

  6. Wanda |  Jan 08, 2007 at 6:18 pm

    Thanks for that analysis! I guess I should’ve invested the full $4,000 in my Roth IRA instead of spreading it out! Ah well, live and learn, right? ;)

  7. jersey jen |  Jan 09, 2007 at 12:49 am

    good post! i use sharebuilder for investing, mostly because it’s automatic and i tend not have a big chunk of money on hand.

  8. TJP |  Jan 09, 2007 at 3:57 am

    Nice work. It’s best to invest money when you have it after all. But since I’m flat broke at the moment, monthly ShareBuilder deposits will have to do for now.

    If I hit the lottery, then that’s another story.

  9. 2 Pennies Earned |  Jan 09, 2007 at 8:05 pm

    I have also read in Andrew Tobias’s The Only Investment Guide You’ll Ever Need that if you have a lump sum to invest, you should invest it all at once. I think strength of DCA is that it’s a more profitable strategy than trying to time the market. Now if only I could decide on my portfolio allocation for 2007…

  10. frank daar |  Jan 31, 2007 at 2:57 am

    If you have the money in hand, as in your first example, it should be in a money market account. this would have e.iminated a large part of the differential you found–especially if the extra bucks were added to contributions in the later part of the year. If you are taking out of a paycheck you obviously will have to do it as in the second case–no brainer.

  11. The Sun |  Feb 01, 2007 at 5:48 pm

    Frank: If you have to save in order to invest a lump sum, the interests earned should also be used to purchase extra shares as you suggested, not just the principles. But I don’t think many people are doing that.

  12. Don |  Mar 09, 2007 at 10:42 pm

    Actually, I’d like to see this same analysis done starting at October of 1987. In the first graph, it looks to me that you got most of your benefit in that first year. Going back to the historical data, this is right on the tail of a precipitous drop. You’ve effectively “timed the market” by choosing this starting point for backtesting.

    What if your first lump sum was a bit earlier, just before the crash of 1987? I suspect the graphs will look a bit differently. It’s just as reasonable an analysis, running from October to October as January to January. The analysis may turn out the same in the very long run, but it will take a while to overcome that first $1200 chunk that underperformed.

    In fact, if you do the year-year analysis for each month, Jan-Jan, Feb-Feb, and so on I suspect that what you’ll find at least is that the lump sum is a good bit more variable in its return over time, and especially compared to month-month.

    That’s not to say that there isn’t value to being in the market longer. I think it is generally accepted that there is. But surely there is a kind of volatility to making fewer strong moves as opposed to many small moves.

  13. The Sun |  Mar 15, 2007 at 9:26 am

    Don: Actually the reason I started the analysis from 1988 was that the earliest data I can download from Yahoo Fiance was March 1987. Thus 1987 isn’t a full year and there’s a lot of reasons to make annually comparison starting January.

    If we start every thing from March 1987 for both monthly and yearly (invest $1,200 very March instead of January), I doubt the result will be any different. In fact, the yearly plan is likely to be even better. If you look at the history of VFINX, it reached the peak in August and bottomed in November, then started to climb higher until peaked again in March 2000. If you invest annually every March, you will get better return than investing every month since you will avoid the peak totally and the price in March 1988 isn’t far away from that in March 1987. Of course, if the first lump-sum was made in October 1987, it will take a longer time to recover the losses, but over a 20+ year period, I don’t know if a monthly investment plan will come out as a winner since there are far more up years than down years and that will favor annual investments, though I don’t have the data to support it. Just a feeling.

    Also for annual investment plan, dividend reinvestment is another benefit as the investment made at the beginning of the year enjoys all the dividend reinvestments throughout the year while monthly plan only enjoy part of it.

  14. Raymond |  Sep 24, 2007 at 5:22 pm

    Investment returns have almost always trended upwards in the long run. There will be certain disaster years (mid 80′s, 2000) when tragedy strikes the markets, but I agree as well that it’s usually best to invest sooner than later. It’s almost impossible to reliably time the market.

    With that said, it’s good to use the proceeds from a steady job to fund any possible investment opportunities that arise!