Dollar-Cost Averaging: Why the Best Investment Strategy Is the One You Actually Stick To

The Schwab study: five investors, 20 years, one clear winner

The Schwab Center for Financial Research designed a study to test what investing strategy produces the best results over time. Five hypothetical investors each received $2,000 at the start of every year for 20 years (2005-2024) and could invest it in the S&P 500 however they chose. Here is what they ended up with:

The most striking number is not who won. Of course perfect timing wins. The striking number is last place: $47,357. The investor who kept waiting in cash always convinced that a better buying opportunity was just around the corner ended up with less than a third of what even the worst market timer accumulated. Schwab notes: "Had he done that each year [invested at the yearly high], he would have earned far more over the 20-year period."

The monthly DCA investor came in third only $3,964 behind the investor who put money to work immediately every January. Schwab tested this across 80 rolling 20-year periods going back to 1926 and found the same ranking held in 70 of those 80 periods. DCA reliably outperforms inaction and bad timing. The gap between DCA and perfect timing is small. The gap between DCA and waiting is enormous.

Why waiting feels safe but costs money

Schwab's research includes a data point that explains why the "wait for the right moment" instinct is so consistently wrong: "In a typical 12-month period, the market has risen 75.6% of the time." That figure comes from 1,177 rolling one-year periods between January 1926 and December 2024.

In practical terms: three out of four times you decide to wait before investing, the market goes up while you wait. You pay a higher price than if you had invested immediately. The feeling of caution "I'll invest when things look clearer" costs money the majority of the time because markets spend more time rising than falling.

The U.S. SEC makes the same point on Investor.gov: "investors who've adopted a buy and hold approach to investing tend to come out ahead of those who try to time the market." This is not an opinion it is the SEC's summary of how markets have historically behaved.

How DCA works: buying more when prices fall

Dollar-cost averaging means investing a fixed amount on a fixed schedule regardless of price. The table below shows 10 months of investing €500/month in a fund that rises, drops, and recovers. Notice what happens in March and April when prices fall.

The simple average of all monthly prices in this period is €94. But because you automatically bought more units in March and April when prices were low (6.67 and 7.14 units instead of the usual 5), your actual average cost per unit is only €91.68. That gap is the mathematical benefit of DCA in a volatile market.

An investor who put the full €5,000 in January at €100 bought exactly 50 units. The DCA investor bought 54.54 units with the same investment over 4 more simply by spreading purchases across the year and letting the dip work in their favor.

The fee you cannot ignore

DCA works best in low-cost funds, because fees compound against you the same way returns compound for you. The SEC's Understanding Fees page shows the impact directly: a $100,000 investment growing at 4% annually over 20 years produces $208,000 with a 0.25% annual fee, but only $179,000 with a 1.00% fee. That is a $29,000 difference, created entirely by fees and their compounding drag.

The SEC states it plainly: "These fees may seem small, but over time they can have a major impact on your investment portfolio." A low-cost global index ETF (typical expense ratio: 0.07% to 0.20%) keeps this drag minimal. An actively managed fund (typical: 0.75% to 1.5%) erodes returns year after year, compounding in the wrong direction.

The Schwab study used S&P 500 index returns and did not include fees. In practice, choosing a low-cost index fund for your DCA plan is part of the same strategy: remove friction, invest consistently, let time and compound growth do the work.

How to set up a DCA plan

1. Choose a low-cost index fund or ETF.The SEC's fee data shows that a 0.75% difference in annual fees costs $29,000 over 20 years on $100,000. A global equity ETF with an expense ratio below 0.20% keeps this drag minimal.
2. Fix a monthly amount you can sustain.It should be an amount you can invest every month regardless of what the market does. Schwab's study shows consistency over 20 years matters far more than finding the perfect amount.
3. Automate it. Set up a standing order on payday so the transfer happens before you have a chance to second-guess it. Most brokers support automatic recurring purchases. This is what separates Matthew Monthly from Larry Linger.
4. Do not stop during downturns.A falling market is when DCA performs best your fixed amount buys more units at lower prices, lowering your average cost. Stopping during a downturn removes the exact months that improve your overall average. As Schwab's data shows, even Rosie Rotten the worst market timer in the study ended up with three times what Larry Linger accumulated.
5. Increase contributions over time. Each time income grows, direct part of the increase into the investment account before lifestyle costs absorb it. Even small annual increases compound significantly over decades.

Sources

• Schwab Center for Financial Research Does Market Timing Work? (2025)

  Source of the five-investor study ($2,000/year in S&P 500 over 20 years, 2005-2024): perfect timing $186,077; immediate investment $170,555; monthly DCA $166,591; worst timing $151,343; cash only $47,357. Also source of the 75.6% upward market frequency statistic (1,177 rolling one-year periods, 1926-2024), and the three behavioral benefits of DCA.

• Investor.gov (U.S. SEC) Risk and Return

  Source of the buy-and-hold finding: "investors who've adopted a buy and hold approach to investing tend to come out ahead of those who try to time the market." Also the statement that stocks have provided the highest average long-term return of any asset class.

• Investor.gov (U.S. SEC) Understanding Fees

  Source of the fee impact data: $100,000 at 4% over 20 years yields $208,000 at 0.25% fee vs. $179,000 at 1.00%. Direct quote: "These fees may seem small, but over time they can have a major impact on your investment portfolio."