How Dollar Cost Averaging Can Damage Your Returns in a Volatile Market

Over the past month I have seen investors go through a myriad of emotions from disbelief to fear and then greed. Right now, investors are looking for certainty in an uncertain market with many asking whether the market has bottomed and is this stock cheap, and can I buy it now.

The more concerning question I am getting right now is from those who own stocks and are losing money, wanting to buy more because they believe the stock is cheap given it has fallen further.

It is one thing to attempt to bottom pick stocks that have fallen heavily but it is another thing altogether to increase your risk by buying more of the same stock that you are losing money on. But individual investors are not to be blamed for following the concept of dollar cost averaging given that it dominates the financial services industry investing mantra, despite it not delivering the results it claims.

Dollar cost averaging involves placing funds into an investment at regular intervals over a period of time regardless of whether the market is moving up or down. But this practice can significantly impact the performance of portfolios and not necessarily in a positive way.

According to industry experts, dollar cost averaging reduces the risk of investing in volatile markets yet right now, we are in a very volatile market and people are losing money. The issue I have with this concept is that the industry promotes this practice stating that it helps to avoid the ‘so called’ pitfalls associated with ‘timing’ your entry into the market.

But I would argue otherwise because this strategy is very questionable when markets are falling heavily, as you are subjecting your portfolio to a higher level of risk, which is exactly what you want to avoid in a volatile market. In my opinion, adding to an investment that is falling in value increases risk and should be avoided at all times. It is far better to wait for the dust to settle or buy an investment that is rising in value.

For now good luck and good trading.

Dale Gillham, chief analyst Wealth Within
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