For the longest time, dollar cost averaging (DCA) has been the gold standard of investing strategy, often recommended by financial planners, whereby investors gradually invest a set sum of money usually each month in the stock market over time.
By using this approach, the theory goes, an investor buys fewer shares when prices are high and more when they are low. DCA is emotionally comforting to investors who may be afraid of placing a large sum into the market all at once. This is fine in theory, but does it really work in the real world?
A recent research paper by Gerstein Fisher took a closer look at the historical performance of DCA versus lump sum strategies to see how the results stack up. He evaluated the performance of the following four distinct strategies over rolling 20-year periods from 1926-2010:
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