Dollar Cost Averaging    (Updated 1/27/11) Introduction “Dollar cost averaging” (DCA) is the term for describing a method of investing small, equal amounts on a consistent and periodic basis into stocks or bonds. DCA is often compared to “lump sum” investing whereby a large chunk of money is used to buy stocks or bonds. Stocks have been volatile. So DCA might appear to be more beneficial than lump sum since money in periodic and small amounts is available to the investor to buy stocks after a decline. In this article, I will examine how DCA would have performed using historical data. While favorable in most periods, there were certain periods when DCA failed to break even. In other words, the final portfolio value was less than the cumulative amount invested. Charts Displaying Historical Data The following charts show the result of buying $1000 worth of stocks (as represented by the S&P 500) at the start of each year. To maintain constant dollars, the $1000 amount of stocks bought in subsequent years is adjusted for inflation. The blue bars represent the cumulative amount that has been added to the portfolio. The last blue bar shows $10,000 and is the cumulative amount, inflation-adjusted, of buying stocks for 10 years. The green area shows the portfolio value at the end of each year. Its value is also inflation-adjusted. These charts were created by my Dollar-Cost-Average Growth spreadsheet (xls). The preceding charts show that DCA produced good results in most decades (1930’s, 1940’s, 1950’s, 1960’s, 1980’s, 1990’s). However, in the decades of the 1970’s and the 2000’s, the portfolio’s ending balance was less than the $10,000 DCA contribution. More Charts Displaying Historical Data Expanding the timeframe from 10 to 20 years, I also see some 20-year periods when the portfolio’s ending balance was less than the DCA contribution. I will show just one example. The chart below shows the 20-year period from 1962 through 1981. The same procedure is applied. At the start of the first year, $1000 of stocks is bought. To maintain constant dollars, the $1000 amount of stocks bought in subsequent years is adjusted for inflation. The last blue bar shows $20,000 and is the cumulative amount, inflation-adjusted, of buying stocks for 20 years. Conclusion Dollar Cost Averaging is a method to accumulate an investment portfolio through small and steady contributions. This method is similar to how workplace retirement contribution plans work. This article examined the results of DCA using historical stock data. During most periods, the ending balance was more than the DCA contributions. However, there were some periods when the ending balance was less than the DCA contributions. So while DCA is an acceptable method of building an investment portfolio over the long term, it should not be expected to produce positive results every time.