Comments on: Risks of Dollar Cost Averaging

By: Bernard

Bernard — Mon, 12 Mar 2007 15:01:11 +0000

I remembered many years back when my friend recommended me to invest into a stock and when the value went south, he suggested that I apply the dollar cost averaging method and invest even more money. However, he wasn’t making sense and he has no backing that the stock would not go even lower. He was just suggesting because he heard this method and not because he understood the market condition.
It is really dangerous just to understand the theory without giving thoughts into it.

By: fivecentnickel.com

fivecentnickel.com — Mon, 12 Mar 2007 02:14:16 +0000

Weekly Roundup – 03/09/07

Here’s a quick look at some of the articles that caught my eye over the past week.

Flexo spent a record amount on electricity last month.
Jim talks about the risks of dollar cost averaging.
FMF shares his opinion of DRIPs.
JLP talks about inter…

By: Miller

Miller — Fri, 09 Mar 2007 18:34:53 +0000

Like everyone else said… DCA is more for mutual funds thans stocks so negate the transaction fees point.

Beyond that, you’re exactly right, DCA only lower risk. It does not increase return. BrianG has an interesting point about the average share cost being lower, but I think this is playing games because this is only a consequence of getting less shares per fixed investment dollar amount (e.g., $200 a month) when they are more expensive. Brian’s statement is true, but I’d argue irrelevant because what we care about is strictly the return on our money. Its confusing though, so I might be wrong.

Anyway, from what I’ve read, *on average* DCA will actually get you LESS return. This assumes you have the situation where you have say, $1k. Do you invest it all at once, or $250 once a month for 4 months. You’re DCA return will be lower statistically (again, run 1000s of trials) simply because your total money isn’t in the market for as long. Given, this situation is quite academic because we get our pay checks in chunks, not all at once up front. Interesting none the less though.

By: Free Money Finance

Free Money Finance — Fri, 09 Mar 2007 11:22:19 +0000

Star Money Articles for the Week of March 5

Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: Five Cent Nickel starts to deal with a fender bender. Blueprint for Financial Prosperity lists the risks of dollar cost averaging. Consumerism Commentary asks h…

By: MossySF

MossySF — Thu, 08 Mar 2007 07:24:34 +0000

Your investments into a 401K is technically not DCA. It’s invest immediately as soon as you get the money. The DCA term only applies to a big lumpsum and you want to choose between investing immediately or spreading it out over a time period.

By: briang467

briang467 — Thu, 08 Mar 2007 01:13:59 +0000

Good post, but the second paragraph doesn’t quite go deep enough. Yes, you mitigate risk, but you also achieve a lower average cost of purchase by buying based on a dollar amount rather than by buying a set number of shares per unit of time. Just like math class, I leave the proof to the reader.

In my case, I can do it automatically in an account with Vanguard, transferring a set amount of $ from prime money market fund to a fund of my choice, and do this every month, replenishing the MM fund as needed. Very easy, I can set it up and ignore, and Vanguard doesn’t charge as long as I pick funds within their fundaccess family – about 2600 choices (although I usually stick wth vanguard index funds, since I’m lazy).

By: The Travelin' Man

The Travelin' Man — Wed, 07 Mar 2007 21:36:14 +0000

I don’t DCA because of any particular strategy. I DCA because I only have a set amount to invest each period. Obviously, through the workplace, it is an every two weeks event, but I also add to my Sharebuilder account monthly, in a relatively small amount. I know that I could do better on costs to save up a few months of investments and make one purchase, but the downside is that the market is (theoretically) ever-increasing, and I would rather be fully invested, if given the choice. Also, Sharebuilder does allow you to purchase stocks in partial shares – which many brokerages will not do. I did just open a Zecco account, which has substantially lower fees than Sharebuilder, and if their trading platform is OK, I will switch my SB account to Zecco. The downside to Zecco is the inability to purchase partial shares – and therefore set up automatic investing.

By: Sun

Sun — Wed, 07 Mar 2007 15:44:03 +0000

I don’t think DCA is ever meant for purchasing stocks when you have to pay a commission (with most brokerage) for each trade, but rather for investing in mutual funds.

By: Jeremy

Jeremy — Wed, 07 Mar 2007 15:02:07 +0000

Well if you are talking about DCA as a lot of work it depends on what investment vehicle it is. Almost all brokerages and fund companies will allow you to establish a systematic purchase for funds at a set dollar amount at the frequency you want for no additional cost. So in this instance it is actually very easy and requires almost no work at all.

If you are DCA with individual stocks, then you have a point. It could mean more commissions and the need to place orders yourself.

By: jf

jf — Wed, 07 Mar 2007 14:27:05 +0000

I agree with your post, but it should be noted that the inherent DCA that comes with contributing to a 401K with each paycheck is pretty sweet. You automatically invest the money as you earn it and you get the benefits of DCA without sitting on a large sum of money.