The market volatility in the first half of 2025 has caused some investors to feel the jitters. When markets are falling, naturally one would feel fear and anxiety, which can lead to rushed decisions such as panic sell and refrain to invest altogether. But, this can be a costly mistake as selling into a falling market would guarantee your losses.
Instead, investors should remain calm and stay focused on their long-term goals. Dollar-cost averaging (DCA) is an investing strategy whereby investors invest a fixed amount regularly regardless of price. By doing so, we buy more when markets are cheap and less when they’re expensive. Over time, this helps to smooth out the ups and downs of investing.
What Is DCA Supposed To Do?
First, it’s worth remembering what dollar-cost averaging is designed to do. DCA isn’t about maximising returns. Instead, it’s more of a risk management strategy and a psychological safety net that essentially “forces” us to invest even when the market is falling or perhaps rising.
When you don’t know where the market is headed, DCA gives you a disciplined way to keep investing without trying to time your entry perfectly.
So if the market is volatile, DCA can still be a useful approach. It keeps you invested while protecting you from the risk of putting everything in right before a sudden drawdown.
On the other hand, data from Vanguard found that lump-sum investing outperformed the DCA approach 68% of the time given the former sees your whole pot of capital invested right away.
And that is aligned with the adage of “time in the market, not timing the market”. With all your capital invested immediately, over a period of 10 to 20 years, lump-sum investing is typically the better avenue from a returns perspective as it has more time to compound.
That’s probably also true in a recovering stock market or one in which an extended bull run is likely.
Is The Market Really Recovering?
This is where things can get more complex for investors. Let’s say the S&P 500 Index has rebounded from its recent low and it looks set to extend gains.
But what if the rally is short-lived? What if it’s a “bear market rally”, also known as a brief burst of optimism before another leg down?
That’s not uncommon to see for investors. Historically, markets have seen plenty of false starts during prolonged downturns.
If you go all-in during one of those false recoveries, you could end up locking in a higher average price than if you had simply stuck to DCA.
DCA Helps You Stay The Course
There’s also a behavioural advantage to DCA that often gets overlooked – it reduces the emotional pressure of trying to time the market.
When markets are shaky, making a big lump-sum investment can be scary, particularly from an emotional perspective. What if the market drops the next day?
That anxiety often causes people to hesitate, procrastinate, or panic sell after a dip – exactly all things you want to avoid doing.
With DCA, you dodge having to predict the perfect entry point. You’re acknowledging up front that you actually have no clue what the market will do next but you’re at peace with that.
If you’ve got a plan and you’re following it, then the rest is just “noise”. And for many of us investing for our retirement or long-term financial goals, that kind of consistency matters more than perfect timing.
So, What To Do In A Recovery Market?
If you’re investing small amounts from your monthly income, there may be no need to change your DCA plan just because the market looks like it’s recovering.
Trying to time the recovery is still a form of market timing and it can backfire just as easily as buying during a rally that turns into another decline.
However, if you’re holding onto a lump sum or you’ve come into some capital from, say, a bonus at work and want to deploy it in a recovering market, you have a few options:
- Split the difference: Invest a portion of it now, and DCA the rest over a few months or every quarter
- Use milestones: Allocate more when the market hits certain levels or shows signs of sustained improvement.
- Stick to your plan: If your original intention was to DCA over 6 or 12 months, keep going. The discipline of sticking to your process probably outweigh the slight gains from trying to optimise every move.
Trying to optimise DCA during a recovery can lead to second-guessing, overthinking, or worse, abandoning your strategy outright.
While data points to lump-sum investing being a better long-term returner of capital, it also takes immense psychological willpower to put a large amount of money into the market. That’s especially true when it’s rising and due a pullback.
However, sticking to our regular DCA contributions and supplementing that with periodic lump-sum investments can help us get exposure to both strategies.
At the end of the day, the most important thing is to be consistent with our DCA approach and take a long-term view when investing into stock markets.
Read Also: Recession-Proof Stocks To Invest In On The SGX
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