Warren Buffett, the legendary investor, recently called dollar-cost averaging (DCA) “the dumbest thing in the world” when applied in certain ways. However, he acknowledges one important exception where this strategy makes sense.
Dollar-cost averaging involves investing a fixed amount of money regularly, spreading out purchases over time to reduce the risk of buying at market peaks. Many financial advisors recommend this approach for investors with a lump sum to invest.
But Buffett, who currently holds over $348 billion in cash and Treasury bills at Berkshire Hathaway, prefers to keep cash on the sidelines until rare, high-value opportunities arise.
At Berkshire Hathaway’s latest shareholder meeting, Buffett stated that forcing himself to invest large sums annually through DCA would be unwise. Instead, he waits patiently for the right moment to deploy capital, a tactic that has helped him outperform the S&P 500 for decades.
His approach is to remain partly in cash to seize exceptional bargains, such as his past investments in Bank of America, Apple, and Japanese trading houses.
Buffett’s key exception applies to passive investors who regularly save from their income. For these investors, consistently investing a set amount over time into index funds is a sound strategy. Buffett recommends that such investors remain fully invested in low-cost index funds to match market returns, as trying to time the market often leads to underperformance.
Research shows that lump-sum investing generally yields higher expected returns than DCA because markets tend to rise over time. However, for those building wealth gradually, DCA helps maintain discipline and reduces emotional investing mistakes.
Buffett’s advice highlights the importance of knowing what type of investor you are. For buy-and-hold investors like him, patience and cash reserves are crucial. For passive investors aiming to track the market, steady, periodic investments into index funds are the best path.
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