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Money Brain: The real driver of dollar-cost averaging is your emotions, not reduced risk

One popular strategy for investors with cash destined for stocks is to employ dollar-cost averaging, or dividing their cash into segments and converting each into stocks according to a predetermined schedule.

Both logic and simulations indicate that investors are more likely to increase their wealth with investing all at once than with dollar-cost averaging. Moreover, risk reduction cannot be a rational reason for the persistence of this strategy.

Why, then, do investors engage in dollar-cost averaging? Framing, loss-aversion, pride, and regret — all cognitive and emotional factors —- are central to this.

Consider an investor with $2,000 in cash he has chosen to invest in stocks because stocks are likely to yield higher long-term wealth than cash, even though they can also inflict losses.

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