Should you invest a small amount at a time to take advantage of dollar cost averaging?
Thanks,
Rob
This is more IMHO than GQ. The GQ answer is that the way to maximize your return is to invest the entire amount up front in the portfolio with the highest expected return over your time horizon consistent with your risk tolerance. If you dollar cost average, the time that your money spends in cash (earning approximately 0% right now) is just an opportunity cost that no amount of time will recover. The trick is guessing which risk-adjusted portfolio has the highest expected return over your time horizon.
My IMHO answer is that the U.S. stock and bond markets, and other correlated markets globally, are pretty high right now. If I wanted to start investing a lump sum, I’d start dollar cost averaging over a period of perhaps three years. Then, if the market tanked over that time period, I might speed up the timing of my investments to take advantage of the lower prices. If they didn’t tank, well, I probably missed out on some of the upside but at least I didn’t commit all my money before markets tanked 30%.
Weigh your options, and look at the market.
This article say jump in all at once - Lump Sum Vs Dollar Cost Averaging
On the other hand - Choosing Between Dollar-Cost and Value Averaging
Whatever the case, stick with mutual funds to dilute the risk.
Dollar-cost averaging is useful if you are dealing with a steady stream of funds for your investment, for example, if you want to invest a percentage of your paycheck every week, DCA is a good strategy.
But if you have money right now, the best long-term strategy is always to get it all into the market as early as possible, so it has the most time to earn a return.
More an IMHO subject, but IMHO, I’d invest it all at once in a low cost stock index fund. Stay away from managed funds, the fees are killers, and none of them reliably beat the market. Vanguard has many index funds with expense ratios less than 0.1%. This assumes you already have 6 months take home pay in liquid assets for an emergency.
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Yep.
Moving thread from General Questions to In My Humble Opinion.
IMHO, the concept of dollar cost averaging is pretty much bullshit. You get a benefit from the concept only when you have relatively large fluctuations in the price of a stock, and those fluctuations remain consistent. But the trouble is, when it’s low, you don’t know that it’s going up again; that’s why the price is low. If you’re investing in volatile stocks, you need to understand the risks.
My advice is like Bill Door’s - invest in an index fund with very low fees. I’m getting close to retirement age, and have moved quite a bit into “RSP” - the Guggenheim S&P 500 Equal Weight Exchange-Traded Fund. That fund will get you a decent return, but with lower risk. Then if you feel like branching out into riskier stocks later, you can move them around. I do almost all my investing now through Fidelity and I’m happy with them.
I think it depends on how big your lump sum is. Are we talking about $1,000 or $1,000,000? If it’s a million dollars then you can afford to hire someone to evaluate your financial goals and come up with a strategy tailored to your particular situation. If we’re talking about $10,000 then index funds or mutual funds probably make sense if your time horizon is more than 5 years. I would stay away from buying precious metals and investing directly in risky ventures.
You’re always better off being in the market rather than out of it, over the long term. Timing isn’t that important. I once saw a projection by AmericanFunds that showed investment results for guy A who always puts his annual contribution in on the best of the year and guy B who always puts it in at the worst day of the year. After 20 years, they’re only about 5% different.
Any benefit from dollar cost averaging is likely to be killed off by lost returns when you’re already sitting on a large chunk of money. (Really, dollar cost averaging is just a way to encourage people to put in $100/month instead of waiting until they have $5000 to do it all at once.)
There’s lots of mention of stocks in this thread, but remember that a good portfolio should be diversified - not only in the type of stocks (small/large, growth/value, US/international), but also with investments like bonds. There are individual bonds or bond funds available. Bonds tend to grow more slowly on average, but they’re less volatile than stocks. If you periodically rebalance a portfolio (returning to a certain percentage of assets based on your risk preferences), you are essentially selling stock high to buy bonds and then buying it back low by selling bonds.
While investing the entire sum immediately typically provides the highest expected return, it may still be wise to do some form of dollar-cost averaging. For instance, if you had lump-sum invested in the S&P 500 index on the morning of October 19, 1987, you would have lost over 22% of your investment by that afternoon:
A reasonable compromise might be to invest 1/3 of the total immediately, another 1/3 in 6 months, and the final 1/3 in a year.
and follow this strategy for low fees (and simplicity).
Bundling this together with the other posts in this thread, my answer to the OP is this:
DCA mitigates the risk of short-term losses at the expense of long-term ROI. If you’ve got a lump of cash and you want to invest it for the long haul (e.g. for retirement), get it out there ASAP. If you expect to sell within the next few years, you may want to DCA over the next year or so.
Another big reason to do it all at once is transaction fees. These days, buying stocks (and sometimes other investments) tends to be a lump sum per transaction, say $8 or $10, not a per-share amount.
If you invest your $10,000 as one purchase, it costs you $10. If you invest it as 100, 100-share purchases, it costs you $1000. For small amounts of money, these add up to a substantial hit on your return, often pushing out the break-even point several years.
Of course, this assumes you are buying the SAME stock/fund/whatever with each purchase. Diversification might require you to do multiple transactions (unless you get it in a single fund, which is ideal), but purely on the face of it, you want to avoid excess transactions.