Comments on: Does Dollar Cost Averaging Work?

By: Mickey

Mickey — Wed, 30 Sep 2009 03:30:28 +0000

Nice piece. I think dollar cost investing works well provided the investor who is profiled understands the possible different outcomes that can result from market direction & frequency used compared to lump sum investing. Volatility of the investment instrument used is also a highly contributing factor on the returns derived from this strategy. With a basic understanding of markets, investor should consider actively shifting between lump sum investing & dollar cost averaging throughout their investing horizon.

Mickey
My Informative Article: Does Dollar Cost Averaging Work?

By: Horlic

Horlic — Fri, 07 Aug 2009 07:25:10 +0000

No doubt, that will be the ideal case if you able to fork out one lump sum money to entry/invest at low price and wait till good price to make good profit from the investment.

For me, i treat DCA as a habit to do monthly savings due to the consideration of poor disipline in money control. I believe youngster and fresh graduates nowadays facing the same problems too. There are just too many entertainment available outside there.

From Dollar cost averaging practice, i success to save lump sum of money to entry higher returns (ofcos higher risk too)investment tools like gold investment and property investment.

By: Pinyo

Pinyo — Mon, 03 Aug 2009 15:02:43 +0000

@Clifford – I don’t disagree that regular contribution is very similar to DCA. And I also agree that DCA lose its effectiveness over the long term because your invested asset is a much larger percentage when compared to your new contributions.

However, the focus of this article is on the INITIAL investment of lump sum — specifically, the way DCA is being “sold” to the public. It simply tries to answer is it better to invest, say $10,000, all at once or spread it across 10 months at $1,000 each. In this instance, you’re usually better off investing the entire amount.

By: clifford

clifford — Mon, 03 Aug 2009 07:31:35 +0000

Sorry to say this Pinyo, I don’t think that you researched this very well. If you start reading investment books instead of looking at internet web sites, You will discover that when you do regular contributions into a stock or mutual fund you are doing what is called dollar cost averaging, or DCA.

Lately on the web there has been a attempt to separate regular contributions from the special case of putting a lump sum in all at once or spacing it out over X periods. The mathematical formula is exactly the same in both cases. That formula is called dollar cost averaging.

If you want to look in to the problems of dollar cost averaging over a long term may I suggest finding a copy of Practical Formulas for Successful Investing by Lucile Tomlinson. Miss Tomlinson goes into the most depth on long term DCA as anyone I have read so far. I have a spreadsheet which attempts to show how DCA loses its effectiveness over time. http://www.geocities.com/lostc.....inloss.xls

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By: Mrs. Micah

Mrs. Micah — Sun, 16 Dec 2007 22:09:55 +0000

I think if I had a big sum to invest, I’d do it all at once. But unless I do, I’ll probably do some form of dollar-cost-averaging. As opposed to buying X shares every time…

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By: Pinyo

Pinyo — Wed, 12 Dec 2007 04:38:11 +0000

@Luis – welcome to Moolanomy. I like your comment — very well said. I especially like the two principles and the subsequent summary. That’s exactly how I would do it as well. Thank you for contributing to the conversation.

By: Luis

Luis — Wed, 12 Dec 2007 00:13:31 +0000

I agree with Rick above. There’s another flaw in the criticisms I’ve seen of DCA: they declare that lump sum investments are “better” simpley because they have larger returns. But this assumes that the way to compare portfolios is just the return, instead of risk-adjusted returns. The argument that lump-sum is better than DCA because it has a higher return is no better than the argument that DCA is better than lump sum because it has lower risk.

In the end, I do think the whole issue is a distraction. The two important principles should be:

1. Invest incoming cash flows as soon as they arrive, according to a clear, careful budget plan.

2. Divide your investments between stocks and bonds to reflect your risk tolerance.

When you apply these principles, you invest lump-sum when you receive lump-sums and you DCA when you receive smaller regular payments, and you manage risk by maintaining a constant asset allocation, not by holding money back.

By: Pinyo

Pinyo — Sun, 30 Sep 2007 12:51:31 +0000

Rick – Welcome to Moolanomy. I believe we agree more than disagree here.

What you called “my version of CDA” is what I called “Regular contributions”. The distinction I made is that DCA (or CDA) meant you already had a big lump sum – e.g., inheritance and you purposefully invest only a small portion of it. In this case, DCA does not make sense because more likely than not, investing that entire lump sum upfront will produce better result.

As far as point B, I would never recommend that to anyone because nobody can accurately predict the market.