Comments on: Dollar-Cost Averaging Your Way Through the Depression

By: rajesh chhabria

rajesh chhabria — Wed, 08 Jul 2009 15:19:06 +0000

well if you invest lump sum and then see your investment go down / most panic and sell off

so on paper comparing returns over 20-30 years lump sum may be attractive / but who holds on in downturns / most lose / dca removes fear and keeps investing/ so what if you earn a few points less / man — ur making profits not loss as most do

cheers

By: Niilo

Niilo — Wed, 28 Jan 2009 16:27:51 +0000

Certainly for a rising stock market, dollar cost averaging (DCA) fails against the lump-sum investment. This is inevitable, as simply all the money is exposed to all the growth. However, my consistent criticism is simply that we do not have our life savings at the beginning of our life. Theoretically we can borrow it and use the gains to make interest payments, but what bank would give a 20-year-old what he claims he’ll have in 40 years? This leaves most people in the situation that they have some savings now, but an employment income stream (with an investment portion) into the future. For a long-term buy-and-hold strategy, it would then be advisable to use an index fund with the lowest possible cost structure (internal management fees and commissions to buy more), put your existing retirement (or long term, 10 year+) money into it, then contribute your investment steam monthly/quarterly/etc, hoping to reap the benefits of the lump-sum investment and the DCA benefits of the monthly payments. Then you really *buy* continuously and *hold* continuously. In my mind, it is really buying into the ultimate representation of a nation’s industry.

By: Ross Williams

Ross Williams — Fri, 12 Dec 2008 04:34:15 +0000

The argument against dollar cost averaging is being made by the same people that priced the market as if there was no risk. And they will never learn the lesson they should have just learned. Markets have risk – you can lose money as well as make it.

By: Bill

Bill — Sat, 08 Nov 2008 22:34:32 +0000

What if you were dollar cost averaging with WaMu? I guess if you’re talking S&P, that’s one thing, but with specific stocks, some might not survive.

By: some1

some1 — Fri, 07 Nov 2008 03:33:37 +0000

“but I’m not sure if waiting to see how things pan out is really trying to “time the market” in the traditional sense.”

it is.

By: Steward

Steward — Wed, 05 Nov 2008 19:41:27 +0000

@ lordskip – Hindsight is 20/20. I think I understand the whole “market-timing is risky” argument, but I’m not sure if waiting to see how things pan out is really trying to “time the market” in the traditional sense. It might just be being prudent?

By: lordskip

lordskip — Tue, 04 Nov 2008 15:43:17 +0000

@steward:

what you’re suggesting is market-timing. There’s quite a lot of material written about why that could be a bad idea.

By: Steward

Steward — Tue, 04 Nov 2008 03:17:29 +0000

I’ve been thinking about this as topic as well. It seems to me like a it would be better to wait until after the fall was over before beginning to pump cash into the market. From what I can see from the graph that you generated, the market fell for well over a year! If a hypothetical investor had shown some patience and held off on a dollar cost averaging strategy for 6 months, 12 months, or even 18 months it seems as though they could have improved returns dramatically. I think that that is food for thought in our current economic conditions.

By: Andy

Andy — Mon, 03 Nov 2008 13:39:38 +0000

That’s true, but on the other hand I believe banks didn’t pay interest on deposits in the 30s.

By: Don

Don — Mon, 03 Nov 2008 13:19:32 +0000

@Dan: Someone recently pointed out (on this blog or another) that like all methods that limit risk, there is some diminished amount of reward that comes with dollar cost averaging. In that sense, it is no different than diversification into bonds and other asset classes.

If you were a person that diversified a year ago and dollar cost averaged a year ago, then it is reasonable to diversify today and to continue to dollar cost average today. In fact, those behaviors a year ago have helped soften some of the recent loss you’ve suffered.

You are correct that in generally-uptrending markets dollar cost averaging is an underperformer. But JLP is also correct that through downturns dollar cost averaging shines.