Everyone who has ever invested has had the thought: “Maybe I should wait. Maybe now isn’t the right time.” Most of the wealth destroyed in investing comes from acting on that thought.
In Part 4, I showed you what happens when you reinvest your dividends automatically rather than taking the cash. A single habit, applied consistently, can more than double your ending portfolio value over thirty years.
This post is about a related failure — one that happens before you reinvest a single dividend, before you buy a single share. It happens at the moment of decision: when do I get in?
The answer most investors give themselves is wrong. Not slightly wrong. Expensively, repeatedly, systematically wrong.
Here is the rule: don’t try to time the market. Invest on a schedule, not a mood. The rest of this post explains why — and what to do instead.
The Impossible Problem
Market timing means making investment decisions based on predictions about where prices are going. Buy before they go up. Sell before they go down. Get in at the bottom. Get out at the top.
It sounds simple. It is completely, demonstrably impossible to do consistently.
I don’t mean hard. I mean impossible — in the sense that no person, no institution, no algorithm has reliably done it over long periods. Not professional fund managers. Not the analysts at major banks. Not Nobel Prize–winning economists. Not anyone.
The reason is not a lack of intelligence or information. It is the nature of the market itself. Every price you see reflects the collective knowledge of millions of buyers and sellers, each reacting to the same news you are reading. By the time you think you know which way things are headed, that belief is already built into the price. You are not seeing opportunity. You are seeing the opinion of everyone else.
There is a simpler way to say this: if timing the market were consistently possible, someone would already be doing it, and the rest of us would be their counterparty every time. The money has to come from somewhere.
What Waiting Actually Costs
Here is where the argument stops being theoretical.
Research going back decades shows that a significant portion of long-term market returns arrive in a small number of trading days — often thirty or forty of them in a decade of roughly 2,500 trading days. Miss those days and you miss most of the return.
The problem: no one knows in advance which days those are.
J.P. Morgan Asset Management has published this analysis repeatedly. In the twenty years from 2003 to 2022, the S&P 500 — a market index, meaning a basket that tracks the five hundred largest U.S. companies — returned approximately 9.8% per year if you stayed fully invested.
Miss the ten best days in that period, and your return dropped to 5.6%.
Miss the twenty best days, and you were down to 2.0%.
Miss the thirty best days, and your portfolio was essentially flat after twenty years.
Those thirty days — out of roughly 5,000 — were the difference between doubling your money and going nowhere.
And here is the detail that makes this worse: the best days in the market cluster around the worst days. They tend to appear right at the bottom of crashes, when the news is most frightening, when the instinct to stay out is strongest.
If you were waiting for the right moment to get back in, you missed the days that mattered most. The cost of being wrong about timing is not symmetric. Getting in too late is far more expensive than getting in slightly early.
The Strategy That Removes the Decision
Dollar cost averaging, or DCA, is the practice of investing a fixed dollar amount at regular intervals — weekly, monthly, quarterly — regardless of what the market is doing.
You do not decide whether now is a good time. You invest on Tuesday the fifteenth of every month, or the first business day of every quarter, or whatever schedule you set. You invest the same amount each time. The only question you have already answered is: how much and how often.
That is the entire method.
It sounds almost too plain to work. It works because of what happens mathematically when you invest a fixed amount at different prices.
What DCA Does to Your Cost
When you invest a fixed dollar amount, you automatically buy more shares when prices are low and fewer shares when prices are high.
This is not a clever move you have to make. It is the natural result of the arithmetic.
Suppose you invest $500 a month into a stock or fund, and prices vary like this:
Month Price Shares Bought
----- ----- -------------
Jan $50.00 10.00
Feb $40.00 12.50
Mar $45.00 11.11
Apr $55.00 9.09
May $60.00 8.33
You invested $2,500 across five months. You bought 51.03 shares. Your average cost per share is $48.99.
Notice what happened in February, when the price dropped to $40. That month felt bad. The news was probably discouraging. The instinct was to wait, not to buy.
But buying that month — because the schedule said to — meant buying 12.50 shares instead of 10. That extra 2.50 shares at a low price improved your average cost. When the price recovered and kept rising, those were the cheapest shares in your account.
DCA does not guarantee you will always buy at the best price. It does guarantee that you will not systematically buy at the worst price. And it guarantees that drawdowns — the scary drops that make everyone want to wait — become mild opportunities instead of panic points. The price fell? Good. Your next scheduled purchase buys more.
The Emotional Benefit
I want to say something that the math alone does not capture.
Most of the damage investors do to their portfolios is not from bad analysis. It is from anxiety. From the steady background noise of asking: is now the right time? And then, more expensively: should I wait?
DCA answers that question once and never asks it again. It is your scheduled investment day. You invest. That is the whole conversation.
This is worth more than it sounds. Every investor I have met — including very experienced ones — has a story about a time they were waiting for the right moment, missed the move, and either chased the price higher or stayed out entirely. The decision not to invest is a decision. It has consequences. DCA takes that decision off the table entirely.
You are not hoping for the perfect entry point. You have already decided to invest on the first of the month, and the first of the month is not a prediction about where prices are going. It is a calendar date.
There is something freeing about that. The market can do whatever it wants. Your job is to show up with your check on the scheduled day.
How to Set Up DCA
The mechanics are simple.
Most brokers — Fidelity, Schwab, Vanguard, and others — offer automatic investment plans that do this for you. You specify the amount, the frequency, and what to buy. On the scheduled date, the purchase happens automatically, the same way a DRIP handles dividend reinvestment.
You can set this up for individual stocks, for index funds, or for exchange-traded funds — instruments called ETFs, which are funds that trade on an exchange like a stock and typically track an index like the S&P 500 or a sector of the market.
For most investors starting out, DCA into a low-cost index fund is one of the most powerful things you can do. You are not trying to pick individual winners. You are buying a slice of the entire market, on a schedule, at whatever price the market happens to be that day.
If you do invest in individual stocks, DCA still applies. Set a schedule. Invest regularly. Do not try to time the entry.
When DCA Is Not the Right Tool
DCA is the right default for regular, ongoing investing. It is not the right approach for every dollar.
If you receive a large lump sum — an inheritance, a year-end bonus, the proceeds from a home sale — the question of whether to invest it all at once or spread it out is a different one.
Research suggests that investing a lump sum immediately outperforms spreading it out roughly two-thirds of the time, simply because markets tend to go up over time and waiting costs you return. But spreading a lump sum over six to twelve months is not irrational either, especially if the immediate psychological risk of investing it all at once would lead you to panic-sell during a drawdown.
For regular investors putting in their regular savings — paychecks, savings contributions, monthly surplus — DCA is the right framework. The math and the discipline work together.
A Note to Luca and Lili
I have an MBA with a concentration in finance. I took this degree because of my interest in investing. I thought that I, with all of my learning, could come up with a method to time the market. For my master’s thesis, I built a model that tracked the movement of the market, the “price” of the Dow Jones Averages. I built a statistical model around this price and, using exponential smoothing, plotted its moving average. I set up bands around that average. If the actual, then current, “price” of the Dow Jones lay above the calculated average, I deemed the market to be “over priced”, too expensive. Depending on how far above the average the current “price” was, I would delay investing part, or all, of my scheduled investment. If the current “price” of the Dow Jones lay on or below the average, all of my funds were invested, including those that I had held back. I tracked the performance of the model against a system using dollar cost averaging. When it came time to invest, invest regardless of the current “price” of the Dow.
I ran this model over 20 years of monthly investment. I believed that I would beat dollar cost averaging hands down. Guess what? The dollar cost average model beat me handily. It started slow but it built over time and absolutely buried my timing model. I can’t remember the actual numbers that the two models generated, but suffice it to say that I never ever considered trying to time the market again.
Set your schedule. Automate it. Show up every month.
The market rewards time, not timing.
The One-Sentence Summary
Because no one can consistently predict which days the market will rise or fall, the most reliable strategy is not to try — instead, invest a fixed amount on a regular schedule so that time, not timing, does the work.
Next: Part 6 — Don’t Fall in Love With a Stock. You found a great company. You held it through the ups and downs. The news is still good, the business is still excellent — and the price is now twice what the business is actually worth. What do you do? In the next post, I’ll walk through the hardest rule in this series: how to sell something you are proud of owning.
— Jim