Comments on: Dollar Cost Averaging: Does It Work In The Real World? How Can I Use It Easily For My Own Investments? http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/ Simple, applicable personal finance advice for the modern world Sat, 20 Mar 2010 13:52:43 -0700 http://wordpress.org/?v=2.8.4 hourly 1 By: drew http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-52203 drew Tue, 31 Jul 2007 20:02:04 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-52203 "Being 27, I ignore DCA. I get a bonus every Feb. I immediately make my previous year IRA contributions." You are missing out by not paying current year at that time as well. To avoid the "January Effect", buy prior year right before Christmas. “Being 27, I ignore DCA. I get a bonus every Feb. I immediately make my previous year IRA contributions.”

You are missing out by not paying current year at that time as well.

To avoid the “January Effect”, buy prior year right before Christmas.

]]> By: broknowrchlatr http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-40017 broknowrchlatr Wed, 27 Jun 2007 20:11:36 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-40017 The inherant problem I have with DCA (and the reason why it is, on average, a bad play is due to the opportunity cost of not investing all at once. Say the market returns an average of say 8 percent over a 10 year perion. If you have investment funds available, you could invest monthly over a year. But, on average, you will lose 1/2 year return doing it this way. You could put it in a high yield savigns acocunt, but you will be sacrificing average yield for security. Being 27, I ignore DCA. I get a bonus every Feb. I immediately make my previous year IRA contributions. Sometimes, I can and will get burned on this but hitting a peak in the market. But, if I do this every year for 30 years, It will average out to getting a better return than DCAing. If you are young and are going to do this a lot, it is better to take the risk. Near retirement, not so much. The inherant problem I have with DCA (and the reason why it is, on average, a bad play is due to the opportunity cost of not investing all at once.

Say the market returns an average of say 8 percent over a 10 year perion. If you have investment funds available, you could invest monthly over a year. But, on average, you will lose 1/2 year return doing it this way. You could put it in a high yield savigns acocunt, but you will be sacrificing average yield for security.

Being 27, I ignore DCA. I get a bonus every Feb. I immediately make my previous year IRA contributions. Sometimes, I can and will get burned on this but hitting a peak in the market. But, if I do this every year for 30 years, It will average out to getting a better return than DCAing.

If you are young and are going to do this a lot, it is better to take the risk. Near retirement, not so much.

]]> By: Shaine http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39921 Shaine Wed, 27 Jun 2007 14:31:37 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39921 It occurred to me at some point that DCA is a good argument to keep peoples' money locked in with a brokerage. Although you do average the cost of your savings plan, it also averages your gains. It would seem more prudent to invest to win, not invest not to lose. It occurred to me at some point that DCA is a good argument to keep peoples’ money locked in with a brokerage. Although you do average the cost of your savings plan, it also averages your gains.

It would seem more prudent to invest to win, not invest not to lose.

]]> By: lorax http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39867 lorax Wed, 27 Jun 2007 11:44:19 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39867 The trick is to know the market direction in the future. Let me know if you find something precise. DCA has been backtested to show that it is worse than lump sum investing 2/3 of the time. Think about it. Markets generally move up! Google for a reference. So again, unless you can call the market moves DCA loses you money most of the time. The trick is to know the market direction in the future. Let me know if you find something precise.

DCA has been backtested to show that it is worse than lump sum investing 2/3 of the time. Think about it. Markets generally move up! Google for a reference. So again, unless you can call the market moves DCA loses you money most of the time.

]]> By: Anthony http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39720 Anthony Wed, 27 Jun 2007 02:55:39 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39720 Something to point out, as Trent says, but doesn't mention is about Mutual Funds managed by a Brokerage in general. Whoever you hold your accounts with, be it Fidelity, Vanguard or any others, when you invest in their respective mutual funds it is usually a NTF (No Transaction Fee) Fund and it should be explicitly stated. Note: there are still maintenance fees associated with them, but no commission on the purchase/sale of said Funds. So if you choose your mutual funds making sure they are NTF funds, you should set up automatic investments and worry not about losses associated with commissions. However, you will have to pay taxes when you choose to sell these investments, unless it is in a tax-free or tax-advantaged account. This doesn't hold true with stocks, because your brokerage is acting on your behalf to purchase a said shares of a company. However, with a few companies (I can't remember them off the top of my head) you can purchase stocks directly from them and avoid a commission. Something to point out, as Trent says, but doesn’t mention is about Mutual Funds managed by a Brokerage in general. Whoever you hold your accounts with, be it Fidelity, Vanguard or any others, when you invest in their respective mutual funds it is usually a NTF (No Transaction Fee) Fund and it should be explicitly stated. Note: there are still maintenance fees associated with them, but no commission on the purchase/sale of said Funds. So if you choose your mutual funds making sure they are NTF funds, you should set up automatic investments and worry not about losses associated with commissions. However, you will have to pay taxes when you choose to sell these investments, unless it is in a tax-free or tax-advantaged account.

This doesn’t hold true with stocks, because your brokerage is acting on your behalf to purchase a said shares of a company. However, with a few companies (I can’t remember them off the top of my head) you can purchase stocks directly from them and avoid a commission.

]]> By: Trent http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39602 Trent Tue, 26 Jun 2007 20:33:47 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39602 Scrappykid: I invest directly with Vanguard - no fees. Scrappykid: I invest directly with Vanguard – no fees.

]]> By: Scrappykid http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39587 Scrappykid Tue, 26 Jun 2007 19:55:42 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39587 How do the above figures pan out if you have to pay a transaction fee each time you buy in? Setting zecco aside for a minute, the lowest per-transaction fee i've found is $4 per trade. At 12 transactions/year, over seven years... that's $336, which comes out over the whole amount for compound gains. How do the above figures pan out if you have to pay a transaction fee each time you buy in?

Setting zecco aside for a minute, the lowest per-transaction fee i’ve found is $4 per trade. At 12 transactions/year, over seven years… that’s $336, which comes out over the whole amount for compound gains.

]]> By: Vicky http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39580 Vicky Tue, 26 Jun 2007 19:36:48 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39580 I would love to see some numbers that take brokerage fees into consideration, especially when investing smaller amounts per month. I would love to see some numbers that take brokerage fees into consideration, especially when investing smaller amounts per month.

]]> By: Danny at Money Socket http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39553 Danny at Money Socket Tue, 26 Jun 2007 18:05:51 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39553 Good findings Trent. For the average investor this is likely the best way to invest. If you don't have the lump sum to begin with, automatic monthly contributions forces you to save money and utilize DCA. An index fund and monthly contributions seem to be the best bet. Good findings Trent. For the average investor this is likely the best way to invest. If you don’t have the lump sum to begin with, automatic monthly contributions forces you to save money and utilize DCA. An index fund and monthly contributions seem to be the best bet.

]]> By: MFJ http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39535 MFJ Tue, 26 Jun 2007 17:36:46 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39535 Would be interesting to see the approach used from 1950-2007 to have a longer timeframe - rather than letting short-term market fluctuations skew the data one way or the other. I have no idea but my guess is that DCA would actually do worse than say investing a lump sum at the beginning of each year. Seeing as how the market goes up a lot more than it goes down chances are DCA would result in a higher cost basis. I have no real reason to believe this other than it just makes sense, would be interesting to see that actual results. I think DCA is a great way to invest, but think you might be slightly hurting your returns, especially if you have the money now and decide to wait and spread it out over the next x months so that you can DCA. Eventually though if you are a regular investment we all get to a point where you should DCA (IE get your money into the market ASAP). If you wouldn't mind doing lump sum once a year vs spreading it out over 12 months from 1950-2007 it would be very interesting to see what the results are. Would be interesting to see the approach used from 1950-2007 to have a longer timeframe – rather than letting short-term market fluctuations skew the data one way or the other. I have no idea but my guess is that DCA would actually do worse than say investing a lump sum at the beginning of each year. Seeing as how the market goes up a lot more than it goes down chances are DCA would result in a higher cost basis. I have no real reason to believe this other than it just makes sense, would be interesting to see that actual results.

I think DCA is a great way to invest, but think you might be slightly hurting your returns, especially if you have the money now and decide to wait and spread it out over the next x months so that you can DCA. Eventually though if you are a regular investment we all get to a point where you should DCA (IE get your money into the market ASAP).

If you wouldn’t mind doing lump sum once a year vs spreading it out over 12 months from 1950-2007 it would be very interesting to see what the results are.

]]> By: FamilyFinanceBlog http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39523 FamilyFinanceBlog Tue, 26 Jun 2007 17:02:34 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39523 Thanks for the simple explanation. It's good to see examples from the "real world" since I've mostly just seen people say "it's bad" and "it's good". Thanks for the simple explanation. It’s good to see examples from the “real world” since I’ve mostly just seen people say “it’s bad” and “it’s good”.

]]> By: Ted Valentine http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39517 Ted Valentine Tue, 26 Jun 2007 16:49:51 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39517 Investing regular amounts of your income over time is not really dollar cost averaging. Its just regularly investing your income, and people agree that's a good thing. Mutual fund companies have used and confused the terminology to increase revenues in my opinion. True dollar cost averaging is when you have a lump sum of cash to invest and you want to invest it over certain period of time in regular amounts and intervals, presumably to reduce the risk of market timing. True DCA (and NOT regular investing) has been studied in depth and has been shown to be a losing strategy over the long term. The studies showed that you are almost always better off investing money you have right away and not waiting. (Use Google to find studies.) There is another method called Dollar Value Averaging. This strategy has been shown to be much more effective than DCA. I'm not going to explain it, but if someone's interested, again, use the Google. Investing regular amounts of your income over time is not really dollar cost averaging. Its just regularly investing your income, and people agree that’s a good thing. Mutual fund companies have used and confused the terminology to increase revenues in my opinion.

True dollar cost averaging is when you have a lump sum of cash to invest and you want to invest it over certain period of time in regular amounts and intervals, presumably to reduce the risk of market timing.

True DCA (and NOT regular investing) has been studied in depth and has been shown to be a losing strategy over the long term. The studies showed that you are almost always better off investing money you have right away and not waiting. (Use Google to find studies.)

There is another method called Dollar Value Averaging. This strategy has been shown to be much more effective than DCA. I’m not going to explain it, but if someone’s interested, again, use the Google.

]]> By: Rick Dahl http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/comment-page-1/#comment-39507 Rick Dahl Tue, 26 Jun 2007 16:19:11 +0000 http://www.thesimpledollar.com/2007/06/26/dollar-cost-averaging-does-it-work-in-the-real-world-how-can-i-use-it-easily-for-my-own-investments/#comment-39507 Yes the numbers you chose showed a much better return using the DCA method as opposed to the up front method. A lot of that increase has to do with the speed at which the market fell and the slower recovery effort. The faster the market hits the bottom, the sooner you can by appreciating assets and the sooner you will hit the break even point, the point at which your portfolio is equal to the amount you have invested. You also chose a period that started with a huge loss. The '00 - '07 period works really well, but I am sure you can find an 8 year period that lags the market. That said, dollar cost averaging is the easiest way to invest. With this method, you don't have to be "right" in your pick of a stock or time the market. This method really only works if you have a long horizon. Yes the numbers you chose showed a much better return using the DCA method as opposed to the up front method. A lot of that increase has to do with the speed at which the market fell and the slower recovery effort. The faster the market hits the bottom, the sooner you can by appreciating assets and the sooner you will hit the break even point, the point at which your portfolio is equal to the amount you have invested. You also chose a period that started with a huge loss. The ‘00 – ‘07 period works really well, but I am sure you can find an 8 year period that lags the market.

That said, dollar cost averaging is the easiest way to invest. With this method, you don’t have to be “right” in your pick of a stock or time the market. This method really only works if you have a long horizon.

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