Dollar Cost Averaging Is For Wimps

It seems beginning investment books always teach dollar-cost-averaging.  While  there are far worse things you can do with your money, I see little reason for anyone to use dollar-cost-averaging.  My August column at Physician’s Money Digest addresses the subject this month in a piece called Dollar Cost Averaging Is For Wimps.  Here’s an excerpt:

Financial pundits often tout dollar-cost averaging (DCA) as a method to manage risk in the markets. However, they don’t mention that the risk this technique is managing is the investor’s own bad behavior. DCA does lower your risk, but just like other methods of lowering risk, it also lowers your expected returns.  There are better ways to lower investment risk more efficiently. – Read More! 

What do you think?  Do you routinely dollar-cost-average in lump sums?  Why or why not?  Comment below!

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Comments

Dollar Cost Averaging Is For Wimps — 13 Comments

  1. I dollar cost average all my monthly retirement contributions the same as 99% of the population that has automatic paycheck witholding of 401k contributions. However I wouldn’t DCA a large lump sum investment and don’t really understand the logic. I would invest any windfalls or lump sums 100% immediately according to my my asset allocation. Can anyone explain the difference between these different scenarios?

    1. You receive a $12,000 windfall and decide to invest it in an Vanguard Total Stock Market (VTSMX) and DCA your purchase by buying $1000 of VTSMX monthly for the next 12 months.

    2. You inherit $12000 of VTXMX from your great aunt but you want to DCA your windfall so you sell your shares and DCA $1000 worth of VTSMX monthly for the next 12 months.

    3. You already own $12000 worth of VTSMX but want to DCA so you sell your shares and buy them back $1000 at a time for the next 12 months.

    If you would do #1 or #2 but not #3 please explain why #1 makes sense but not #2 or #3.

  2. As someone coming out of training, I think DCA works as I’m trying to catch up for the decade of lost investments. Later down the road, I’d probably do lump sum investing.

      • Not necessarily. Someone who wants to contribute to an IRA or other account could chose to set up a periodic monthly deposit or could wait until the end of the year when taxes are due and make a single lump sum payment. You don’t have to have the lump sum in hand for this issue to arise.

        But I agree, usually comes up when someone has a large lump sum to invest and is nervous about going “all in” at one time due to the risk that the market could drop. I think that is more a problem of asset allocation though, because there is nothing different about the market risk for new money compared to existing money one already has invested.

  3. I DCA our IRAs for a few reasons, but namely because at the end of the day its accounted for in the budget, and I don’t have to think about it. As as we have already discussed here, timing the market is a poor investment strategy. DCA offers regular investing at a simple, but proven effective strategy. I really differ in opinion with the arguments made in this article. 99% of investors can easily make ~400/mo investment if its set up in their budget to be a set “cost”, but saving to make $5000 at one time brings out the second guessing to the timing of the investment in probably everyone, and often leads to misinformed emotional investing.

  4. There was a study done by an academic at least 10 years ago. I remember discussing it with my financial advisor, but do not recall the name of the study, nor its author.

    The main conclusion: since people are so very, very, very bad at market timing the time to make your IRA contribution is the first business day of January ….. not part in January, February, March, etc. And certainly not one lump sum right when you calculate your taxes and decide it’s time to put money into an IRA, say April 13th.

    Your money has more time to grow. And time for growth trumped DCA every time. (The study did the actual calculations using low-cost index mutual funds and high cost load funds, etc)

    After I read that study, I no longer DCA’d anything.

    • While I agree, in the end lump sum investing at the start of the year may be marginally better in the end, this means that you have $5500 or $11k if married to dump into an IRA.

      I believe I have seen that same study. I couldn’t find it, but I found something even better I thought I would share http://www.moneychimp.com/features/dollar_cost.htm It’s a website where you can play around with lump sum investing (say you have a winfall) and DCA. Depending on the year, either won out.

  5. Generally I’m against stop/loss orders because it is contrary to the highly popular ‘buy low sell high’ in that it forces you to sell low. Yes, it may prevent you from a catastrophic loss but it also might kill you with a whipsaw. If you buy at 100 with a 90 stop loss and you hit your loss so it sells, then it jumps back up to 100, do you buy back in again? Almost always its better to ride it up or down.

    I will recommend stop/loss orders in situations where people are dependent upon the money for their daily needs such as someone who is retired withdrawing 4% and could be really hurt in situations like 2008. That being said, someone retired should not have a substantial portion of their portfolio in equities anyway.

  6. Oops, commented on the wrong section.

    Also against dollar cost averaging except in very volatile times. Market generally goes up, unless there is a high risk of a fallout, better to just throw it all in at once.

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