Dollar-Cost Averaging Is Complete BS

Eddy Elfenbein submits: This is from an investing article that appeared a few days ago:

A widely recognized investment strategy known as dollar cost averaging offers a systematic approach to investing. By following this plan, you invest a specific dollar amount at set times, regardless of where the market may be at the time. One of the advantages of this strategy is that it can be applied to a wide variety of investment vehicles.

As you know, the market price of an investment fluctuates. By using dollar cost averaging, you can buy more shares when the price is low, but you buy fewer shares when the price is high. While that seems fairly elementary, the interesting thing is that by spreading out your investment dollars this way, the average cost you pay per share can actually end up being lower than the average price per share over an extended period.

No. Wrong. Incorrect.

I don't mean to pick on this writer in particular. You can find dozens of such articles every month. The problem is that dollar-cost averaging is complete bullshit.

Don't get me wrong: The idea of investing fixed sums each month isn't a bad. That's how many people invest because that's how they're paid.

But there is absolutely no inherent advantage in dollar-cost averaging over lump-sum investing. ZERO. Spreading out your investments over an extended period doesn't decrease your risk one bit. The idea has been thoroughly refuted, yet the myth won't die.

The advantage of dollar-cost averaging was blown to smithereens nearly 30 years ago in this article by George Constantinides. Here's another article on the subject by John R. Knight and (my old finance professor) Lewis Mandell.

Lump sum investing is the best. Don't diversify by time; diversify by assets.

Comments

[keith]

Agreed on the point of dollar cost averaging down over time. The research I have read has pointed out there is a slight advantage to lump sum. Obviously, you could be killing your self with transaction cost over time. However, averaging down (not up) on individual equites can be very rewarding. If you take a position in an equity and the market has over reacted for some reason, but your thesis has not altered.....why not buy more?

2007 Jul 11 06:17 AM

[kurt walter]

Don't diversify by time or assets. You will never get seriously rich doing either. I have made my most money buy owning at most only 3 or 4 stocks at one time, period. Use stop losses. That is how you get the most bang for your buck. Diversification is always mentioned by sellers of financial products. They are just trying to avoid lawsuits if your portfolio melts down because of YOUR poor investments picks. A concentrated portfolio can make the most money. Watering down your portfolio gives you watered down results.

2007 Jul 11 12:26 PM

[Living Off Dividends]

yup.
but people who believe in DCR won't believe you.

2007 Jul 11 07:13 PM

[NutritionFacts]

Generally, you should add as the trade goes in your direction. This is crucial if you're leveraged. If you're not...well, you living life as a tortoise and frankly you can probably do you what bloody well like cos it'll take 1000 years before you make any decent wonga anyway.

2007 Jul 13 07:52 PM