Many investors regard dollar cost averaging (DCA) as an effective way to remove emotions from investing. In particular, it is thought to be helpful when trying to enter a new investment by detaching the investor from the nearly impossible task of timing “tops” and “bottoms.” Instead of buying all at once, the investor spaces out the investment over many purchases separated by regular intervals, in effect obtaining an “average” of the price over the investment period.
However, the entire point of investing is to buy at the lowest possible price and sell at the highest price. This results in maximum gains. Since DCA is indifferent to the price, an investor following this strategy will purchase the stock both when it is low and when it is high, giving them an average cost basis.
Although an investor generally does not have the ability to time absolute bottoms and tops, he does have the choice to buy all at once or DCA into an investment. The question is, which of these strategies is best?