Comments on: Why Dollar-Cost-Averaging Works: A Look at the Numbers

By: Mike

Mike — Fri, 12 Feb 2010 03:09:00 +0000

For what it’s worth, the above post is speaking specifically to investing monthly because that’s the way in which people are paid.

For those with a lump sum to invest, I’m generally in the “put it all in now” camp.

By: Craig

Craig — Fri, 12 Feb 2010 01:50:40 +0000

I remain generally unmoved by DCA as an investment choice (investing every pay period is a different matter–you don’t have the money before each paycheck comes in, so you don’t have the choice to invest up front versus in bits and pieces over time). If the market average is down over your investing period, you will do better with DCA. If the market average is up over the period, you will do worse. Your example really didn’t show anything new in this sense: the three purchase periods your calculation covered average $66.66. So you DCA’d into a falling market (50 percent gain followed by a 66 percent loss), and beat the person who invested up front. The final return to 100 allows us to show a gain, rather than just less of a loss than the lump sum investor, but it doesn’t really change anything.

If we reversed your example and considered a 66% gain (to 166) followed by a 50% loss (to 88), we’d find the DCA investor owned only 273.88 shares to the lump-summer’s 300, and so would lose to the lump-summer at any final share price–one dollar, one hundred or one thousand.

Why is this important? If we believed that stocks were not going to appreciate in value over time, no one would buy them. If the market rises, the DCA investor always loses to the lump-sum up-front investor. If the market falls, the DCA investor “wins”–but _we_wouldn’t_invest_in_stocks_ if we believed that, over time, the market was more likely to fall than rise.

Perhaps there is a valuable psychological function provided by DCA, because we are so risk-averse. If the market falls, we at least console ourselves that we didn’t invest everything at the peak. And if the market’s up…well, we’re still making money, right? But arithmetically, it is not a good proposition for an investment that you expect to appreciate over time.

Yours,

Craig

By: Monevator

Monevator — Fri, 28 Nov 2008 08:37:56 +0000

What about if you’ve got a lump sum of say $100,000 at the start. Is it better to Dollar-Cost Average it in over say five years, or to chuck it in at the start…? (I have my own views, but I’ll leave it as a thought for the reader/blogger… )

By: Mike

Mike — Wed, 29 Oct 2008 12:24:14 +0000

Hi Jerry. Thanks for stopping by and commenting.

I know just how you feel. I first started DCA’ing into an index fund in the Fall of 2001. I figured the market had already gone down a ton, so it must be about to head back up. Wrong! It went nowhere but down for another year.

The good news though is that it *did* come back up. (Just as it will this time.) We just have to remember not to panic and take our money out.

Also, Sept-Oct isn’t exactly a very long time frame. Dollar-cost-averaging is designed to work over an extended period (ie, several years). Over 2 month time periods, it’s almost impossible to predict what will happen.

By: Jerry Hung

Jerry Hung — Wed, 29 Oct 2008 05:12:27 +0000

DCA usually works, unless you started like September 2008

I don’t have the chart handy, but quite certain the general trend is a downward line, where it’ll almost certainly take couple years for the indexes to get back to their “previous” levels

Sigh, I kept buying at the bottoms, then the bottoms bottomed again, and again, and again, and not done yet