What Makes the Dollar Cost Averaging Strategy So Popular Today? A Critical Review of the Benefits and Risks of a Controversial Investment Scheme

The dollar-cost averaging (DCA) strategy is an enigma. Proven suboptimal from a risk-adjusted performance time and again since the late 1970s, it is nevertheless more popular today than ever. Our empirical analysis makes no exception. The DCA strategy does almost systematically show a lower level of volatility than the so-called lump sum investing (LSI) strategy, but there is no free lunch. The price to pay is a significantly lower level of return, leading more often than not to lower Sharpe ratios. Yet, the DCA strategy has its merit. It prevents investors from giving free reins to their “animal spirits” and paves the way of least resistance to build up an estate. This being said, recent developments shed a new light on the DCA strategy, and suggest that the liquidity profile of its order flow could very well be the key driving factor of its success today. The collateral effect is that retail investors looking for an efficient way to securely build up positions in risky assets could finally end up with more risks than they think/feel, and possibly than they can really stand. Caveat emptor.