A Better Dollar-Cost Averaging Strategy For Your Investments

Dollar-cost averaging is the act of consistently investing in a particularly security over a set interval of time. Whether you know it or not, you are likely dollar-cost averaging every time you get a bi-weekly or monthly paycheck.

For example, at the beginning of the year, you may elect a fixed percentage of your pre-tax salary to go to various investments in your 401(k). That's a form of dollar-cost averaging.

But what if you've got $2,000 left a month after you contribute to your 401k and pay your basic living expenses? You could invest an additional $1,000 every month into an S&P 500 ETF, regardless of whether it's reaching record highs or going into the crapper. That's dollar-cost averaging too.

Some may say this is a form of market timing. That's true. The reality is, every decision you make is market timing. So don't get too caught up about when to invest in the stock market. The key is to invest when you can and consistently over the long run.

Dollar-Cost Averaging Is A System

The great thing about dollar-cost averaging is that you don't have to think too much. All you have to do is not forget to invest.

To do so, you make investing a certain amount or percentage of income automatic. Eventually your financial nut will grow so large you'll achieve make it rain status.

But what if you consistently have excess cash flow after maxing out your tax-advantageous retirement accounts? You also realize that the key to retiring early is being able to amass a large enough passive income portfolio to pay for your living expenses.

In such a scenario, we must think about a more appropriate dollar-cost averaging strategy to build maximum wealth. Let's think things through and lay out a foundation first in this very expensive market.

A Better Dollar-Cost Averaging Strategy

My dollar-cost averaging strategy is to invest more than my normal amount whenever the S&P 500 corrects by more than 1%. I've tried to stick to this strategy for over 20 years.

Growing your wealth is all about practicing good financial habits that last over the long run. Sticking with a system of saving and investing will do way more than trying to uncover a unicorn stock for most.

At some point in your life you may have a financial windfall (year-end bonus, inheritance, gift). Or, there might also be violent corrections in the stock market, like the one we experienced in March 2020 when the S&P 500 sold off by 30%.

Given the stock market trajectory over the long-term is up and to the right, we should come up with a framework on how to best take advantage of opportunities in a methodical way.

It's kind of an oxymoron to “figure out” how much to dollar-cost average, but hear me out. Hopefully my framework will help you better deploy your cash. 

Pay Down Debt Or Invest

Before you invest, you should always understand your opportunity cost. If you have debt, your opportunity cost is not making a guaranteed return equal to your debt interest rate.

Hopefully most of you agree with the logical proposal of FS-DAIR, my debt pay down or invest ratio framework.

FS-DAIR says to use your highest interest rate debt to determine the percentage of disposable income allocated towards paying down said debt. e.g. 6% student loan debt = 60% of disposable income to pay down debt, 40% to invest. The percentage split doesn't have to be exact. FS-DAIR simply provides a guideline.

Before initiating one of my mortgage pay off strategies, I was investing around 65% of all disposable income into the stock market. My highest debt interest rate was a 3.5% rental mortgage.

For illustrative purposes, let's say my monthly after-tax disposable income after basic living expenses is $10,000. Without fail, I will invest $6,500 a month into an equity ETF or a favorite real estate crowdfunding investment. $3,500 will go towards paying down debt.

But the reality is I can invest $0 – $10,000 a month in the market so long as my income keeps flowing in (build multiple income streams!) Furthermore, I've always got some cash sitting on the sidelines waiting to be deployed for investments, operating needs, or emergencies.

The first step to decide how much to invest beyond your average investment amount is to understand what is the average daily percent change in the S&P 500. See the chart below by Bespoke Group.

Average Daily Percent Change In The S&P 500


The average daily percentage change in the S&P 500 since 2006 is +/- 0.76%. Therefore, 0.76% is the baseline where we should consider investing more money in stocks on down days.

We've gone from a crazy 3-4% average daily change swing during the recession to a relatively mild +/- 0.76% by July 2011. Volatility came back with a vengeance in 4Q2018, 1Q2020, and 2022.

To smooth things out, I've drawn a line at a +/- 1% change. A 1% change is easier to remember than 0.76% change.

Therefore, my decision for when I'll be investing more than my normal 60%-70% a month of cash flow into the S&P 500 is when the S&P 500 corrects by more than 1% that day. Alternatively, I will invest more when the S&P 500 has corrected by more than 1% since the last time I dollar cost averaged.

Here's another great visual highlighting the historical S&P 500 volatility from 2009 – 2019. As you can see from the chart, the S&P 500 usually moves between -1% and +1%.

Historical Stock Market Volatility Over 10 Years - better dollar cost averaging strategy

Example Of Better Dollar-Cost Averaging Strategy

Let's say the return on the S&P 500 is -1.5% from two weeks ago since I last invested $6,500. I'll be looking to invest up to an additional $3,500 ($10,000 – 6,500) that month instead of using the $3,5000 to pay down debt. Why? Because the S&P 500 declined by more than my dollar-cost average threshold of 1%.

Exactly how much more to dollar-cost average is a judgement call. It depends on your liquidity beyond the bi-weekly or monthly cash flow and your existing net worth allocation makeup.

The worse your target index performs beyond 1%, the more you should consider investing.

For example, let's say your hurdle is -1% and the S&P 500 declines by 1.8% since your last investment. Consider allocating 80% of the money that would have gone to debt towards your investment instead.

In this case, I'll take 80% of the $3,500 I would have used to pay down debt and invest it. In other words, I will invest my usual $6,500 a month + $2,800 ($3,500 allocated to debt X 80%) for a total of $9,300. Only $700 out of the $10,000 will be used to pay down debt.

As of now, we've been talking about when to invest more in the stock market. But we can also use the same strategy in reverse.

Dollar-Cost Averaging To Invest Less

Let's say the stock market is up 1.5% since you last invested. You're nervous about the future. Or, you may have some liquidity needs. Therefore, you may want to invest less than your usual $6,500 a month cadence.

You could reduce your dollar cost average by 50% and use the savings to pay down debt instead. In this example, you could reduce the $6,500 allocated towards investing by 50%. The $3,250 would be saved or used to pay down more debt, in addition to the $3,500 already allocated towards debt pay down.

Here's how I'm investing $250,000 in a bear market. I deploy dollar-cost averaging, some strategy, and some market-timing as well.

Counting Cards Analogy

My dollar cost averaging strategy is similar to counting cards to get an edge in blackjack. You want to press your bets when the odds are in your favor. In general, I like to invest when I believe I have greater than a 70% chance of winning.

Let's say you are playing single deck blackjack. The Hi-Lo system subtracts one for each dealt ten, Jack, Queen, King or Ace, and adds one for any value 2-6. Values 7-9 are assigned a value of zero and therefore do not affect the count.

The idea is that high cards (especially aces and 10s) benefit the player more than the dealer, while the low cards, (especially 4s, 5s, and 6s) help the dealer while hurting the player.

When the count is super high (when a lot of low cards have been dealt, meaning the probability of high cards being dealt has increased), you are encouraged to bet more to increase your total payout.

Obviously, nothing is guaranteed. Further, the stock market tends to go up in the long term. I'm just trying to give you an analogy of how professional gamblers utilize a system to stay disciplined and try to increase their odds. Having a system you methodically follow is what will help you get rich. It will also help you not leave a lot of cash uninvested over the years.

Invest In Stocks Is Good In The Long Run

Unlike gambling, investing in the stock market is usually not a zero sum game. You might lose 20% on your investment. However, you seldom lose 100% of your investment like in gambling, unless you go on margin and get wiped out.

Here is a great chart that shows the biggest one day gains and losses in the S&P 500 as well. Over time, volatility seems to have increased. For example, many NASDAQ component stocks in 2022 are down over 60% in the past six months alone.

Largest daily percent gains and losses S&P 500

Compare Investment Performance To A Risk-Free Rate

Another way to figure out when to invest more is to compare the 10-year bond yield to a market correction. For example, let's say the 10-year bond yield is at 3.5% and the market corrects by more than 3.5%. That might be a signal for you to buy.

Another signal to dollar-cost average more is when your investment declines by more than the highest interest rate of your debt. For example, if the market declines by more than 3% and your mortgage rate is 3%, you can consider buying more than your normal cadence.

Of course, nobody knows where exactly the market is going. This is why we are consistently diversified between stocks and bonds. Further, if you are unsure about an investment, you can always go halfsies.

I personally like to look at securities that have corrected by at least the guaranteed 10-year government bond yield AND that provide a dividend yield > 10-year government bond yield. I feel like I'm getting a deal, despite the reasons for a decline in the first place.

No Need To Over Think Things

The purpose of dollar-cost averaging is to make investing easier for the average person. Most of us have day jobs and have better things to do with our time. As a result, at the very minimum, we just max out our 401(k) and/or IRA and think that's all we need to do.


We need to consistently dollar-cost average as much of our extra cash flow as possible into a taxable investment account. You can invest for principal appreciation, for dividends, o both.

If you don't like building a taxable investment account, build a real estate portfolio instead to diversify beyond your tax-advantageous retirement accounts. Real estate is actually my favorite asset class to build wealth due to the utility and income it provides.

I believe consistently investing over time is more than 80% of the battle to achieving great wealth. It's how many can get to $1 million dollars in their 401k by age 60. The people who wonder where their money went often lacked the focus to keep on investing.

The Latest 401(k) Balance By Age Versus Recommended Balance For A Comfortable Retirement

Dollar-Cost Average Forever

Figure out how much you can comfortably invest each paycheck and get going. You might not agree with a +/- 1% bogey for when to contribute less or more than average. That's OK. Figure out your own dollar-cost averaging strategy and stick with it forever.

Then track your net worth and your portfolios online to make sure your risk exposure is appropriate with your risk tolerance. You also want to make sure you aren't paying excessive fees.

I ran my portfolio through a 401(k) Fee Analyzer and found that I was paying $1,750 in portfolio fees I had no idea I was paying! I would have paid over $90,000 in fees over 20 years if I didn't get rid of my expensive actively managed mutual funds that were charging 0.75%-1.3% active management fees.

Some of you might be thinking that my dollar-cost averaging strategy is simply timing the markets. You bet your bottom dollar it is. Every time we invest money, we are timing the market whether you like it or not.

The point is that I have a dollar-cost averaging system that works for me. It has given me the confidence to consistently invest for over 25 years. Perhaps my dollar-cost averaging system will give you the same confidence as well.

Investing Suggestion

If you can't be bothered with dollar-cost averaging, then consider having a hybrid digital wealth advisor like Empower invest your money for you. Once you sign up for their free financial tools. You can also get a free consultation with a registered financial advisor to go over your asset allocation.

In the long run, it is very hard to outperform any index. Therefore, the key is to pay the lowest fees possible while staying invested for as long as possible.

If you want to just manage your money yourself, then Personal Capital has an excellent Investment Checkup tool. It x-rays your portfolio for excessive fees and provides asset allocation advice based on your objectives.

Over the long term, you want to invest in stocks. Stocks have traditionally returned 8-10% a year since 1926. Don't get behind. Use a DCA strategy to help you build wealth. Stock valuations are close to 20-year highs. Dollar cost average is a more appropriate way to invest than ever before.

Free investment checkup tool to ascertain proper asset allocation

Dollar-Cost Average Into Real Estate

The reason why dollar-cost averaging into stocks is a big topic is due to stock volatility. The S&P 500's 32% correct in March 2020 was a stark reminder of why dollar-cost averaging is a good idea. Then the S&P 500 corrected again by 19.6% in 2022.

If you want to dampen your stock portfolio, consider investing in real estate. Real estate is my favorite asset class to build wealth because it is less volatile, provides utility, and generates income.

The combination of rising rents and rising capital values is a very powerful wealth-builder. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties gave me the courage

The Best Private Real Estate Platforms

Fundrise: A way for all investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has over $3.5 billion in assets and 400,000+ investors. You can easily dollar-cost-average into Fundrise funds because the minimum is only $10. For most people, investing in a diversified private fund is the easiest way to gain real estate exposure. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. They potentially have higher growth as well due to demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio. 

Fundrise Performance To Dampen Volatility

Below is a great chart that highlights Fundrise returns through bull markets and bear markets. Notice how Fundrise funds outperform public REITs and stocks during down years.

If you want to dampen the volatility of your portfolio and take advantage of the long-term demographic trend of moving to the Sunbelt, I'd invest with Fundrise. As a semi-retiree, I hate volatility. I much prefer earning steady single-digit gains instead of experience booms and busts.

Fundrise Returns

About the Author. Sam worked in investing banking at Goldman Sachs and Credit Suisse for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments. Since 2009, Sam has helped for free millions of people on their path to financial freedom. 

75 thoughts on “A Better Dollar-Cost Averaging Strategy For Your Investments”

  1. Thank you for this article. I’ve referred to it for years now. I’m looking forward to reading your book this year. I am just finishing The Simple Path to Wealth and more focused than ever. I am a semi retiree as well from the Financial Services industry. I’ve spent the last year or so prioritizing self care and my family. I’m now refreshed and considering helping more people to grow their wealth and enjoy life. Merry Christmas to you and your family!

  2. Is there an app in which I can connect my funds, my bank, and set thresholds in which this can be done automatically?

  3. This seems to be like a hybrid to dollar value averaging as much as dollar cost averaging. How do you feel regarding dollar value averaging?

  4. I like the idea behind this system. It would be interesting to see a case study on how this system would have performed over 5 or 10 years or more using real historical market data, vs. a traditional once per month, same amount every month approach to dollar-cost averaging.

    “We need to consistently dollar-cost average as much of our extra cash flow as possible into a taxable investment account.”

    One potential problem with this, and one of the reasons why I have prioritized retirement savings over taxable savings, is that taxable investment assets can count against you when college financial aid is determined, while assets in an IRA or 401(k) (or Roth versions of those accounts) don’t count against you. At least that is what I have read, but I haven’t yet had direct experience with college financial aid for my kids. Sam, I would be interested in your take on this.

    1. I used to think about the negatives of having too big a taxable account when it comes to applying for financial aid. But I’ve changed my tune in recent years.

      1) Financial aid is just a loan with an interest rate, not a grant. Therefore, it’s not that attractive.
      2) I’ve opened up a 529 plan for each child, which should hopefully cover the large majority of their college expenses in 14.5-17 years.
      3) I believe we all will be much richer in the future, which further negates the need to game the education support system.
      4) Colleges may be free in the future.
      5) Perhaps my kids don’t go to college but focus on managing a rental property portfolio or small family business.

      I think we should focus on building so much wealth that financial aid becomes an afterthought when it comes time to apply. Let’s be so smart and so wealthy that we can skip this step.

  5. Simple Money Man

    DCA = consistency for sure! What do you mean by if the market corrects by 1% or more?

      1. Simple Money Man

        That’s what I figured. But what if it’s down by 1%, next day up by 5%, next day down by 1%. Would we be better off buying in the beginning?

        Is this more of a psychological strategy? I’m asking because I do something very similar but am wondering if I should switch to lump sum investing (which is harder mentally to execute) as I’ve heard that yields greater performance long-term.

  6. Smart! I love how you have a system in place that works well. I need to use a system like this to keep myself disciplined and consistent. Thanks for such a thorough post!

  7. Silly to be concerning yourself with the high fund fees on an actively managed fund/ETF when the gains on those far exceeded a laggard mutual fund with weak returns.

    1. I have read this as well, but this works only if you have the lump sum available to invest up front. If you are putting say 10% of your salary into your 401(k) with each paycheck, you don’t have the option to make your entire annual investment at the beginning of the year.

  8. A passive strategy is dollar cost averaging plus rebalancing across asset classes. This will reduce investment in a particular asset class when it has performed strongly recently and vice versa.

  9. Sam
    I am not sure I understand the following paragraph:
    “Let’s say the return on the S&P 500 is -1.5% from two weeks ago since I last invested $6,500. I’ll be looking to invest up to an additional $3,500 ($10,000 – 6,500) that month instead of using the $3,5000 to pay down debt. Why? Because the S&P 500 declined by more than my dollar-cost average threshold of 1%. ”

    Lets say I am investing $6500 per month to S&P. Lets say I bought SPY on Nov 1 2020 at 350. Lets say SPY gone down by 1.5% from 350 (i.e 344.75) on Nov 20th.
    Are you suggesting I buy more of SPY on Nov 20th at $344.75?

  10. Thanks for this. It makes good sense.

    I have been wondering how to balance my monthly investment strategy with the market ups and downs. Also what to do with the odd extra cash.

    I think I am going to adopt something similar.

  11. I have been actively trading in and out ETFS and GLD with my IRA during this recent Covid-19 recession. I’m not sure if it has been genius (vs no active management) or if I have become a victim of my own doing. Time will tell. I aim to get that lump sum in soon that I took out as the market was declining. In the last two weeks I have managed my trades/investments without a clear predetermined strategy. Truth be told I was trying to time the bottom. I have concluded that I prefer a disciplined predetermined strategy. DCA is a start, but I think there has to be a ratio that is optimal.

    I am in search of ratio to buy that is much better than just a typical DCA approach.

    This ratio is a percentage of cash to buy the primary investment instrument (for me it’s VOO or VGT) for the percentage of the dip.

    For example, every dip of 1% in the V00 should be responded to with an automatic limit buy order of, let’s just say, 25% of what I have available in my money market fund. Every 2% decline in the VOO should be a 50% buy in (money market funds to buy VOO shares) and so on. The cash position in the money market fund is the DCA, but rather than put it right into one’s preferred investment vehicle without regard to the fluctuations of the investment seems like a lot of upside potential is being squandered.

    Any chance you could offer an optimal ratio?

    I think a more tightly titration of the DCA entry buys over time could make a huge difference? Thanks for any brain power you can throw at this.

  12. With Betterment, PC, and similar online systems, doesn’t it concern you that you have to give them access to your financial accounts?

  13. Hi Sam:

    I know this article is a few years old, but I recently found you and have been implementing your system. I have run into an issue with the system and I am hoping you can help.

    My current highest debt interest rate is 3.625%. Using your system, I use 36% of my available funds to pay down debt and invest 64%. I am investing every 2 weeks. The past month has now seen market gains higher than 2% over these 2 week periods. Applying your system, I would then be contributing 100% to debt reduction. Do you have a minimum that you would suggest continuing to invest? Am I missing something? It seems like I will not begin investing again until the market gains are between 1 and 2%.

    Thanks for your time and for sharing!

  14. Vancouver Brit

    Doesn’t re-balancing essentially achieve the same as this? I.e. increasing investments in assets that recently performed poorly and reducing investments in assets that recently performed well?

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  19. About 95% of dollar-cost-averaging articles just tell you what the basic concept is and why it works. They’re all fairly boring, mostly because they conclude with some statement like “if you’re contributing to your 401k then you’re already doing it. ” And then you wonder why you bothered to read the article.

    Then there’s a few like this that take the concept a little bit father. But still, it’s all on the buy side.

    There’s virtually nobody talking about how DCA works on the sell side. I know that’s because DCA works against you on the sell side so nobody bothers to write about a strategy that doesn’t work. But the problem is that DCA feels just as natural, and hence is just as likely to be used, on the sell side as on the buy side.

    The working guy says “I can manage to save $500 a month.” Its easy, automated and works to his advantage.

    The retired guy says “I need $3000 per month to live on.” So he cashes out 3k every month. Easy and automated but he doesn’t even think about how it works. When the market is down he’s cashing out more stock units at a lower return. When the market is up he’s cashing out fewer units even though he could be selling more to lock in the higher returns and potentially buffer through the lean times.

    I’d like to see an article that suggests strategies to automate efficient sell-side behavior. When I try to imagine what it would look like I think:

    * Split assets at a conservative ratio between stocks and bonds.
    * Pull regularly from the bond side as needed for living expenses.
    * Rebalance occasionally (annually?)

    The rebalancing still seems like DCA, just at a lower frequency. Unless you applied some sort of positive feedback mechanism (a scary thing to have in an automated process). But maybe it’s enough to soften the DCA effect. And if stocks tank one year you may actually find that you’re buying back stocks to rebalance. So it’s not pure DCA.

    1. I do write in this article,

      “As of now, we’ve been talking about when to invest more in the stock market. But we can also use the same strategy in reverse. For example, let’s say the stock market is up 1.5% since you last invested, or 50% higher than your bogey. You could conceivably reduce your dollar cost average by 50% $3,750 in my case (from $6,500), and use the other $6,250 to pay down principal instead. Buy low, sell high right?”

      Most of us are looking to accumulate capital and believe in the long run upward trajectory of the markets.

      Thanks for commenting!

      1. Huh? I don’t think you addressed my point at all. I’m trying to figure out how I will systematically and efficiently pull assets to support my spouse and I in retirement. Your suggestion is to add less to my investments when the market is up? That’s buy-side! I won’t have income in retirement hence I won’t be buying any (except as a part of rebalancing and reallocating).

        I think you’ve actually illustrated my first point quite effectively. Financial writers apparently can’t even think about sell-side once the topic of DCA comes up. Like some sort of buffer over-run error occurs in their brain.

        Of course I want to accumulate capital for a long, long time. But at some point I’m going to need to use those assets. Otherwise what’s the point?

          1. Thanks for the article link. I hadn’t thought of that approach. Just for that I’m giving you a 50% raise over what I’ve been paying you. Don’t spend it all in one place!

            I actually thought I was giving you an idea for a new article. Silly me to think you hadn’t covered it already.

  20. Dollar cost averaging is a great way to reduce risk and make investing straight forward. Your method is quite interesting and it definitely take out the stress of watching the market daily.

  21. For most people, I think “dollar cost averaging” into an index “SPY” or a similar index style mutual fund is the best way to go. Put it on “auto-pilot” and forget about it!

    The more fooling around, the more profits lost.

  22. Done by Forty

    I’ll admit that I’m more on autopilot re: how much to DCA. Basically, all available dollars after expenses go into the market every month, according to our AA, en route to early financial independence. I like the system you’ve laid out, but it’s likely a bit too complicated for the relatively small dollars we’re working with.

  23. It was stressful to watch market on a daily/weekly basis – I was sure to have an heart attack. I switched to dollar cost average only to not look and just keep tucking away. I like to think it is a gift to myself when I need it later when I am 65. That gave me peace of mind!

  24. Stefanie @ The Broke and Beautiful Life

    Due to my horribly inconsistent and unpredictable income (something I’m working to change), I tend to do a lump sum investment at the end of the year. I save throughout the year to reach that lump sum, but I like to have it liquid until I know that I’ll have enough income to sustain. It’s like my emergency fund and investment savings are a hybrid- again, something I’m working to really change going forward.

    1. Liquidity really is important given unexpected expenses. You never want to get caught in a liquidity crunch so I think what you’re doing is fine.

      I use the FS-DAIR system. Each time I do pay down debt or invest I do feel that liquidity risk until the next inflow of cash comes.

  25. Generally fully share you thought logic. However, please note, that there is a study from Vanguard that shows that market averaging (compared to a lumb sum investment) is underperforming:

    Obvioulsy due to the fact that most people do not have a lumb sum, market averaging because the only cost.

    However, I myself still prefere market averaging over a lumb sum investment (currently sitting on quite some cash), because it is simply emotionally more bearable despite the underperformance.

    Once benefit is also that I have “ready to go cash” available, in the rare case that a discreationary undervalued investment shows up.

  26. I pretty much don’t do it anymore unless I’m infusing a BUCKET load of cash in one fell swoop (well more than 100K).

    My horizon is still pretty damned long.

    And according to the Bogleheads WIKI, “For a completely rational investor, lump sum investing will always produce a higher expected return, because it immediately moves your funds from asset classes with lower expected returns to ones with higher expected returns…”

    I’m not completely rational, but I’m a F load closer than I used ta be.

    1. Umm, unless the stock market crashes after investing that bucket load of money and the cash retains its value.

      Nobody knows, hence a methodical DCA system where one pressed when the bogey has been breached.

      1. I think the point is that because the market consistently uptrends, your bucket load will more often than not increase in value. Since, like you say, no one knows what will happen in the future, the “rational” investor will assume the market will go up after the large investment.

        If that’s is too much risk, I think 6 months is a reasonable time frame to DCA the lump sum (but the rational investor will still assume they will likely lose out on some potential gains for the added safety).

        That being said, I still invest a bit “extra” every time I see the market drop a percent or more. Maybe that just means I’m not investing enough in the first place if I have extra money to do that with :)

  27. DCA is exactly what I have been doing for years. For the average investor its just the easiest way and right thing to do for the long term. A lot of us average guys will get burned if we go looking for those unicorns. However, I do set aside a small amount for that thrill of investing in certain individual stocks. But I have found more often than not that I just don’t have the stomach for it. DCA into low cost index funds really takes the stress out of investing and guess work. If one must own individual high risk stocks, MOMOs, IPOs etc. Do it with a small amount of your net worth, so should it go belly up. Your net worth will not take such a huge hit.

  28. Well after today, we should all be increasing our contributions.

    I really like the blackjack analogy. I don’t put your system in practice, but I have long thought about it. Why wouldn’t you invest more after the market has gone down and reduce your investments as the market rises.

    It seems natural that if you have a finite amount of dollars to go to savings (either debt pay down or investments – see how I tied in the last topic), then it would be natural to figure a neutral way to allocate those dollars between the two and adjust as market conditions indicate.

    If interest rates rise, you would reduce debt paydown. Likewise, if the market rises, it seems the odds are less likely it will rise again.

    I think the key is to just be consistent over a long period.

    Good stuff.

    1. Indeed. My system has worked for me for the past 15 years more or less, and I think it will work for others over the long haul too.

      The big thing to watch out for is avoiding a liquidity crunch.

  29. Hi FS,

    Been following your blog for a little while and has inspired me to take more of an interest (haha) in my own investments.

    With interest rates so low here in the UK at the moment, my mortgage is only 1.2% and so I’m piling money into the markets and cash at the moment (staying away from bonds for now).

    I like the idea of a “mechanical” system to help apportion each month, or whenever you are regularly investing. But, why a 50 day avg? Is this to smooth out some of the day-to-day volatility?


    Mr Z

    1. A little rough in Euroland right now! I’m investing though in FEZ.. the Euro Stoxx 50 index.

      You’re free to use whatever average you like to figure out your bogey for investing more or less while dollar cost averaging.

      1. Thanks FS!

        Yeah, it’s not great in some respects here at the moment!

        Ah ok. I will have a look at this (and play around with some spreadsheets). Apart from automatic payments into my pension I find it really hard to put money into the market as I want to try and time it. This should knock that on the head. :)

      2. I am not so sure. Save, save and save more. Why? None of your readers say I am saving to just have fun. I am saving to buy a $30,000 Rolex. I have one and it is fun. I am saving to fly first class to Europe. I am saving to give the person I love the most his/her dream.
        If you get seriously sick, you will wish you did it differently. I suggest each year you take 20% of your profits and be as irresponsible as you are capable. This way you never touch the principal. Sorry, but in the years w/o profit, it is a hotdog at Costco.

  30. Sam, this is a great piece. I love reading your posts. Curious what you would recommend for those who are paid most of their earnings at year-end (e.g. large bonuses)?

    1. Ahhh….. large bonuses, I had those once! lol.

      I would follow the FS-DAIR system of deploying your bonus.

      And for your bi-weekly or monthly paychecks, I would STILL try to continuously invest throughout the year. Make it a game of saving 100% of your bonus and saving as much of your base salary as possible through savings and investing. You won’t regret it.

  31. I like this system. It would work perfectly with my i401k. Currently, I contribute $1,450 manually every month. Since it’s manual, I can adjust the amount according to the bogey line. Or just add extra employer contribution whenever the market is down.
    This won’t work for my wife’s 401k, it’s a pain to change the contribution. Thanks for the system.
    How about making an app so I can get an alert whenever the bogey line is crossed?

  32. SavvyFinancialLatina

    The auto invest feature works once you have an emergency fund established. Then it’s all about regular contributions.

  33. I don’t understand the market or companies nearly as good as the average investor and that’s why I stick with dollar cost averaging on my boring index funds. Every month I put the same amount of money regardless of how the market is doing.

    The only thing I haven’t done is considered how much to invest and how much to pay down debt. I am currently investing more than what I’m paying on debt but that was just how I felt was right. I didn’t really take the interest rates into consideration. I’m probably not going to change anything since I plan on paying off my debt by April. After that I’ll be debt free… until I buy a house.

  34. Since I don’t understand the market at all, I’ve been doing what you described since I started working. Max out a 401k and HSA via work, then auto-contribute to a 529 plan and a taxable account brokerage account with after tax dollars. I determined the amount I should save and do it without thinking the money was ever mine to spend to begin with. I picked low cost ETFs, except with windfalls I have bought a couple equities that sounded like a fun idea along the way just because I think they make cool products, and as luck would have it, they turned out to be winners!

      1. Dr. Remoulak

        Just echoing Sam’s comment. Opened 529’s for each of my kids the month they were born and have been DCA’ing the same amount since that time automatically, set it and forget it. Barring a complete market meltdown right before they begin (4 and 5 years from now respectively), I’ll pay for ~40% of their tuition with the TAX FREE gains (if they go to a private school, if not, they’ll have plenty left over). Such a great vehicle for those who make it a priority.

  35. I have been dollar cost averaging into the market for many years. I stay very consistent (same amount every month) and only occasionally change the investments. I think the consistency is the major benefit of dollar cost averaging.

    1. Above Average Black

      Same here. Same amount every month for many years. I buy direct stocks though, not mutuals or etfs (for the most part)

  36. Sam, great post.

    Can you go into a bit more detail in the difference (advantage/disadvantage) between ETF and mutual fund? I’m with you in regards to dollar cost averaging, but why S&P 500 ETF (VOO) instead of S&P 500 index mutual fund (VFINX)?

    1. ETFs trade like stocks (can be bought/sold at a premium or discount to net asset value). Mutual funds trade once per day once the closing net asset value is determined (i.e. you don’t get a final price until the end of the day).

      Some 401k/brokerage/ROTH/etc charge different fees for each. When it comes to ETFs, just make sure you’re not buying at a big premium to Net asset value (or discount… as that could indicate some type of problem).

      Generally, it shouldn’t matter…

      1. Mutual finds generally have higher expense ratios (VFINX at 0.17% vs. VOO at 0.05%). So if you think that the fund manager can do at least 0.12% better than the ETF before expenses, you’re better off with the mutual fund. If you’re of the camp that a fund manager can’t beat an index, then the ETF would be the cheaper option. Because of the reasons that Ravi brought up, ETFs are also more liquid. Mutual funds sometimes have early redemption penalties if you sell within a certain amount of time (i.e. within 30 days or 90 days) after you purchase them; that doesn’t happen with an ETF.

  37. Similar to what you mentioned, but much less methodical.

    I have several things on auto-invest: max 401k, max Roth, $200/week into taxable (buy S&P index etf’s every week or two). This totals to around $33k/yr.

    Then, sort of like your idea of “the best time to buy a house is when you can afford it“, I similarly invest in other stocks/ETFs whenever I feel inclined. More than half the battle is won simply by deploying capital in a reasonable manner. Even if I bought a random stock from the S&P every two weeks, over a few years, I’d probably perform similarly to the index (timing, amounts, etc would make a difference, but time would likely smooth out significant differences).

    A little effort in keeping a good mix of everything in taxable, traditional ira/401k, and Roth so nothing is really a heavy bet also helps.

    I don’t need home runs every year to achieve my goals. A single for 90% of investments and the occasional double play will get me most of the way there.

    1. I agree about hitting singles and doubles for the long run. It’s not worth always shooting for homeruns. A punt fund worth 5-10% max of investable capital is fine, but I wouldn’t recommend more.

  38. Per usual, you’ve developed a system that pretty well nails my gut instinct.

    I keep an eye (to be fair, like 4 times a year) on the Shiller PE Ratio. Below 20, and every extra cent goes to investments. Above 25, most goes to debt repayment. In between it’s a mix. How did I pick those numbers? Pretty much pulled them from my butt. Similar to you, I think just having a plan and sticking to it is 80% of the battle.

    Makes me think that I should learn some backtesting software and actually run the historical numbers for these strategies… Maybe that’ll be a winter project.

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