Dollar-Cost Averaging Through a Bad Year

Sunday night, the transfer screen open. The cursor sitting over the button that pauses the monthly contribution. The market had been falling for most of a year. I had written about this exact decision. I sat there for twenty minutes anyway.

The argument in my head was completely reasonable, which is what made it dangerous. Why keep putting money into something that keeps going down. Pause it, let things settle, build up the cash, resume when it is clearer.

What “settled down” turned out to mean

There is no definition of it. That is the whole flaw, and it took me those twenty minutes to find.

Prices do not announce that they have finished falling. The conditions that make it feel safe to start again are the conditions that exist after a recovery has already happened, which means the plan I was designing would have had me sitting in cash for the months when my fixed contribution bought the most shares, and returning for the months when it bought the fewest. The decision that felt like caution was a decision to skip the low and buy the high, dressed up in the language of prudence.

I did not pause it. I would like to say that was conviction. The truth is duller. I could not write down a rule for restarting that did not embarrass me.

The number I should have been watching

Here is what was actually happening. Three months, small numbers, so you can check it.

Say you put in $500 a month. The fund is priced at $50, then $40, then $32.

The first $500 buys 500 / 50 = 10 shares. The second buys 500 / 40 = 12.5. The third buys 500 / 32 = 15.625.

You have spent $1,500. You own 38.125 shares. Your average cost is 1,500 / 38.125 = 39.34 a share.

Compare that with the simple average of the three prices, (50 + 40 + 32) / 3 = 40.67.

Your average cost came in below the average price you paid. No skill, no timing. The fixed dollar amount did it by buying more shares when they were cheap and fewer when they were dear. That gap is the entire mechanism, and there is nothing else to it.

What I want to be fair about

This is not a way of avoiding losses. I have seen it sold that way. Money already invested at the start of a decline fell with everything else. Mine fell with it. What spreading purchases buys you is a reduction in timing risk and a plan you can actually stick to, which is a real benefit and a smaller one than the marketing implies.

If you have a lump sum sitting in cash today, the honest evidence points the other way, and it is laid out in dollar cost averaging vs lump sum. The answer there is less comfortable than the version most people repeat.

I should also say this. I do not know how I would have behaved in a longer decline. Mine lasted about a year. I have never tested myself against three, and I am suspicious of anyone who is confident about how they would handle a thing they have not been through.

What I changed afterwards

I stopped opening the account during bad stretches. I set a reminder to look once a quarter. Automation only helps if you do not spend every month arguing with it.

I check the contribution amount once a year for affordability. That is the only version of this decision that contains any information. How I feel about the market is not information about my budget.

And when I want reassurance I run the numbers, because commentary is written to be read in exactly those weeks and is priced accordingly. The dollar cost averaging calculator will show you the share count and the average cost across a series of prices, which turns a feeling into two numbers you can look at directly.

What the money buys matters as much as the discipline of buying it, and a broad low cost fund is what makes a plan like this survive decades: the reasoning is in index funds explained. If you are setting the whole thing up for the first time, how to invest in stocks walks through the account, the funding and the first order in order.

If you do one thing this week, find the share count on your statement and write it down next to the date. Then do the same next quarter. During the accumulation years the balance is the number that hurts and the share count is the number that matters, and they move in opposite directions in exactly the months when you most need to see the second one.