Which statement best describes dollar-cost averaging in terms of its long-term behavior?

• A. It may underperform lump-sum in rising markets.
• B. It guarantees higher returns.
• C. It eliminates all risk.
• D. It always costs less due to compounding

Answer: (A)

Dollar-cost averaging smooths purchases over time, which helps reduce the risk of investing a large sum at the wrong moment. But when markets rise consistently, putting the entire amount in at the start lets that money participate in all future gains from day one. With DCA, part of the money is bought later at higher prices, so the average cost per share ends up higher and the overall portfolio may grow more slowly compared with a lump-sum investment. Over the long term, this tends to lead to underperformance relative to investing the full amount upfront.

It doesn’t guarantee higher returns, it doesn’t eliminate risk, and compounding isn’t a special cost advantage for DCA—compounding works for any investment left to grow over time.