Week 28 Day 1: Dollar Cost Averaging: Buy the Same Amount Every Month

You invest $500/month into VTI. January: VTI costs $250. You buy 2 shares. February: VTI drops to $200. You buy 2.5 shares. March: VTI rises to $300. You buy 1.67 shares. Total invested: $1,500. Shares owned: 6.17. Average cost: $243.11/share. Average price over the period: $250/share. You paid less than the average price because you automatically bought more shares when they were cheaper.

DCA versus lump sum investing: if you have $60,000 to invest, should you invest it all now or spread it over 12 months ($5,000/month)? The data says lump sum wins approximately 66% of the time (Vanguard, 2023) because markets trend upward and sitting in cash sacrifices expected returns. However, DCA wins psychologically nearly 100% of the time because the maximum regret is smaller. If you lump sum at the market top, you may endure a 30%+ drawdown immediately -- an experience that causes many investors to panic sell. DCA limits worst-case regret: even if you start DCA at the top, you buy the subsequent dip at lower prices, reducing your average cost. The optimal compromise: if you have a lump sum, invest 50% immediately and DCA the remaining 50% over 6-12 months. This captures most of the lump sum advantage while managing regret. If you are investing from income (as most people are), DCA happens naturally through automatic monthly investments. You are already doing it. The key: never stop your automatic contributions during a downturn. That is the exact moment when DCA provides the most value -- you are buying shares on sale.

DCA is often criticized in academic literature as suboptimal relative to lump sum investing because it reduces expected terminal wealth by maintaining a higher average cash allocation (Statman, 1995; Brennan, Li, and Torous, 2005). However, this critique assumes the investor's utility function is solely defined by terminal wealth, ignoring the regret function (Bell, 1982; Loomes and Sugden, 1982). When regret is incorporated into the utility function, DCA can be optimal for sufficiently regret-averse investors (Hayley, 2012). The mathematical argument: for a risk-averse investor with initial wealth W and a market with expected return mu and volatility sigma, the optimal investment schedule depends on the ratio of risk aversion to regret aversion. When regret aversion is high (common in practice), spreading investments over time reduces the utility cost of potential adverse outcomes. Empirically, Lusardi and Mitchell (2014) found that only 34% of Americans possess basic financial literacy. For this majority, the behavioral benefits of DCA (reduced anxiety, maintained participation during downturns, removed need for market timing) far outweigh the approximately 1-2% expected return cost relative to lump sum investing. The most important feature of DCA is not that it optimizes returns -- it is that it keeps investors invested during the periods when their emotional impulse is to flee, thereby capturing the equity risk premium that panic-sellers forfeit.