Dollar-cost averaging involves investing a fixed amount regularly. Which statement best describes its effect?

• A. It reduces volatility by spreading purchases and, for long-term investors, is beneficial; however, it may underperform lump-sum when markets rise steadily.
• B. It guarantees higher returns.
• C. It may underperform lump-sum in rising markets.
• D. It eliminates all market risk.

Answer: (C)

Dollar-cost averaging is investing a fixed amount at regular intervals, regardless of price. This approach smooths entry into the market and helps reduce the risk of investing a large sum just before a drop or spike. But when the market is rising steadily, spreading the investment over time means part of the money sits out or is paid for at progressively higher prices, so you miss the early upside. In that scenario, investing all at once captures more of the market’s gains, making lump-sum investing typically superior. So, dollar-cost averaging may underperform lump-sum in rising markets. It does not guarantee higher returns and it does not eliminate market risk.