The Effectiveness of Dollar Cost Averaging Under Varying Market Conditions

Dollar-cost averaging (DCA) is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions. By consistently buying over time, you smooth out entry prices, reduce the impact of short-term volatility, and avoid the risk of mistiming the market with a single large purchase.

DCA has often been presented as an effective portfolio management technique, and financial advisors and brokers encourage clients to adopt it. But is it truly effective, or merely a marketing scheme?

Reference [1] critically examined this question. The study employed Monte Carlo simulation, rather than historical backtesting, to explore the issue. Specifically, the authors utilized Geometric Brownian Motion (GBM) to simulate stock prices under various market conditions. They pointed out,

This study explores the relationship between market volatility and the returns of the Dollar-Cost Averaging (DCA) strategy, which involves investing a fixed amount at regular intervals. Using Monte Carlo simulations, the research compares DCA with the Buy and Hold (B&H) strategy, analyzing the impact of market drift, volatility, and transaction frequency. The findings show that DCA performs better in highly volatile markets but underperforms B&H in stable markets. Transaction frequency also plays a key role; reducing investment frequency improves DCA outcomes. Key conclusions include: 1) DCA is more effective in volatile markets, 2) B&H may yield higher returns in stable conditions, and 3) minimizing transaction frequency optimizes DCA. This research provides insights for optimizing DCA based on market conditions and asset volatility.

In brief, DCA is effective when volatility is high; otherwise, it underperforms buy-and-hold.

This study highlights the importance of critical thinking and the need to examine every assumption and marketing claim with hard evidence. It also demonstrates how Monte Carlo methods can be applied to such analyses.

Further, the paper leads to interesting questions about the validity of position-sizing techniques such as scaling in and out.

Let us know what you think in the comments below.

References

[1] Siyuan Sang, Ru Bai, Haibo Li, The Dynamic Relationship Between Market Volatility and Dollar Cost Averaging Strategy Returns: An Empirical Investigation, in Proceedings of the 2025 3rd International Academic Conference on Management Innovation and Economic Development (MIED 2025)