Comments on: Dollar-Cost Averaging

By: UH2L

UH2L — Sat, 19 Jun 2010 00:44:31 +0000

One thing you’re forgetting is that most people dollar cost average as they earn money, (as in investing in their 401K’s every two weeks when they get paid). Effectively, they’re investing in small periodic lump sums. For people with a bunch of cash, then there is a decision to be made and I still think dollar cost averaging makes more sense. That’s because volatility is very high (at least these days). The market goes up or down 2% quite often. If you balance this against yearly returns of 3% or 5% or maybe 7%, the day you buy with a lump sum can make a huge difference. I would only buy with the lump sum if I feel lucky.

With volat

By: Doug Warshauer

Doug Warshauer — Wed, 16 Jun 2010 20:13:03 +0000

There is truth to your argument that dollar cost averaging when you have a large lump sum to invest will, on average, generate a lower return than simply investing it all on day one. More often than not, you will pay higher prices for your later investments than you did for your initial one.

If you were to have many opportunities to invest a large lump sum, it would clearly make sense to take advantage of the odds in your favor and, each time, invest the entire sum at once. For instance, if you owned a business that through off $50,000 of excess income each month, you would not dollar cost average each $50,000 chunk. Of course, another way to look at it would be that you are actually dollar cost averaging your $600,000 annual income!

For someone who only gets one chance at investing $50,000 into equities, the calculation is a little different. While dollar cost averaging lowers the expected return, it also lowers the risk. If you dollar cost average your investment in over a year, the expected return diminishes by about $1,500 ($25,000 x 6% excess equity return over cash). I think many people would think this a reasonable price to pay to avoid a precipitous drop in their entire investment within a year after they make it, if investing this money is a once in a lifetime opportunity.

By: Doug Warshauer

Doug Warshauer — Wed, 16 Jun 2010 19:13:00 +0000

If you were to have many opportunities to invest a large lump sum, it would clearly make sense to take advantage of the odds in your favor and, each time, invest the entire sum at once. For instance, if you owned a business that through off $50,000 of excess income each month, you would not dollar cost average each $50,000 chunk. Of course, another way to look at it would be that you are actually dollar cost averaging your $600,000 annual income!

For someone who only gets one chance at investing $50,000 into equities, the calculation is a little different. While dollar cost averaging lowers the expected return, it also lowers the risk. If you dollar cost average your investment in over a year, the expected return diminishes by about $1,500 ($25,000 x 6% excess equity return over cash). I think many people would think this a reasonable price to pay to avoid a precipitous drop in their entire investment within a year after they make it, if investing this money is a once in a lifetime opportunity.

By: Rob Bennett

Rob Bennett — Wed, 16 Jun 2010 14:51:22 +0000

Those who practice Dollar-Cost Averaging are ignoring price when they buy stocks. I wrote a column this week arguing that "Dollar-Cost Averaging Is a Loser Strategy":

http://deathby1000papercuts.com/2010/06/investi...

Rob