Is using the cost average effect a good investment strategy?

According to my experience, when you go to a bank and say that you want to invest 100,000 Euro you happen to have, the investment adviser invariably brings up the cost average effect and recommends that you don’t invest it all in one go, but spread it over several weeks or months. So, the theory goes, should the market tank in the next weeks or months, you will buy the assets cheaper and reduce your losses. I wonder if this strategy is supported by reality; my instinct says no. It does not seem a terrible mistake, but it is not the best you can do.
Studying the markets historically I see a graph that rises 5 - 7% every year on average with wild random fluctuations of up to 30% in both directions. Those fluctuations are unpredictable, so you cannot use them to your advantage. But if you invest part of your money later you incur an opportunity cost: you leave the 5 - 7% on the table. Sure, if you had happened to invest just before the (dot)com bust or just before Lehman Brothers went belly up or in January 2019 you would have suffered big, though relatively short term losses. But those are the exceptions, it seems to me. I guess the only way to know would be to run a Monte Carlo simulation with real historical data. That should show how often the strategy would have worked in the past and how often not. Does anybody know about such a simulation? Or any other sound argument, for that matter.
And why do the banks recommend this? What is their advantage when their clients invest in rates instead of a lump sum, if they have any benefit at all?

I inherited ‘spare’ money from my parents and my Bank (in the UK) recommended I put it all into an investment fund.
I could choose my level of risk (from Government Bonds to Australian gold mines) and whether I wanted to concentrate on capital growth or income.
That’s worked well over the years.

I looked into DCA after seeing the movie Boiler Room and ran numerous simulations in Excel. DCA appears at first glance is a risk-management strategy in that if the investment trends down in value you lose less money but if the investment trends up you make less money. However, let’s say you have a stock that always stays around 10% of its original purchase value. Then my simulations show that DCA has a slight advantage. I believe the reason can be exemplified by this example.
Scenario 1: The stock price doesn’t change. You invest D dollars at stock price P and you have S shares with S = D÷P (for the sake of the example we assume you can buy any real number of shares.
At the end of two weeks you have (2D) ÷ P shares
Scenario 2: The stock price fluctuates around a central point. Week 1 you spend D dollars to buy S1 shares at price (P+r). Week 2 you spend D dollars to buy S2 shares at price (P-r).
At the end of two weeks you have S1 + S2 shares. Doing some math and based on the fact that (P+r)(P-r) < P^2 you would have more shares with DCA.

Is DCA a good investment strategy? (Not financial advice. I am not a financial advisor) IMO
Risky investment: Yes to reduce risk as it goes down
Solid investment: No because you don’t make as much as it goes up
Stable investment: Partly as long as you consider other things such as dividends, volatility, etc. before making your final choice.

Thanks for your contribution. Of course nothing here will be considered financial advice, I am only asking out of curiosity. I also believe that the forum rules would not allow financial advice, but people may have an opinion with some arguments to back their position up. Perhaps I should have put this into IMHO, if the mods think so, feel free to move it.
And now to your answer: Are you implying that DCA is a better strategy the riskier the investment is? From a logical point of view I am not sure I can follow. If DCA is a good strategy, it would seem to follow that it will be most useful for risky investments, if it is not, it will neither help with risky nor with not risky investments.
I’ll come back later, now I must leave, sorry!

That’s why myself personally, I would classify DCA as more of a risk-management strategy than an investment strategy. This may contradict what I said above but that was a theoretical here-are-what-the-numbers-say. Let’s look at the reality of investments.

The main advantage of DCA is that you lose less money as the investment value declines over time. So theoretically, yes it is better to DCA if the investment is losing money. But then my question is: what the hell is your exit strategy? Who buys an investment expecting steady long-term losses? And DCA is horrible if you are in something like an index fund that expects steady growth.

The most likely scenario for DCA would be if you are getting a stock that fluctuates around a fixed point. There the risk-management may make since if the fixed point drifts down over time and the increased number of shares is good if the fixed point rises slowly enough (look at the moving averages). The caveat is there are a lot of considerations in an investment like that. For example, with being able to compound your dividends through DRIPs, if it is a dividend stock with a decent yield, I’m going all-in pre ex-div DCA advantages be damned.

My thought has always been that this suits the individual who has a regular surplus income to invest. Someone with a lump sum should probably look at spreading the risk in several different areas - geographical and financial.

To answer this, find out if you get charged per trade. I suspect the companies that charge for every trade are the ones that most highly encourage DCA

Why are you getting investment advice from a bank?

I changed jobs and had several hundred thousand in a 401(k) I wanted to move to an IRA account. I chose to put it all in a cash account and shift it to a target-date mutual fund over a period of about a year (roughly ten percent each month). Dollar cost averaging in other words. Later, though, on reviewing this, I noticed that I was doing so during a time of rising prices and would have been slightly better off just to dump all of it in the mutual fund at the beginning.

Good question. I know they are not working for me but for themselves. But I listen to all the available informations that I can get. I do not follow their advice very often, but sometimes the bank has had a reasonable idea.
I will not follow any advice given here either, if any is given at all, but I am curious and have the time to listen.

I do not.

For many people, these should be the same thing.

It helps alleviate reluctance to invest. “But what if the market starts going down? I’ll just do this next month.” is a reason there are a lot of people who don’t remember to do it next month.

This rather old post summarizes most of my thinking on DCA: Dollar Cost Averaging Is For Wimps

It is a risk-management strategy, but one that could probably be better met by simply using an appropriate investment allocation that aligns with your need and ability to take risk.

One other thing to consider is the time-horizon of the investment. Is this for retirement in 30 years? 10 years? Next year? Is it just part of your overall savings? That could color your strategy.

Finally, as to why advisors or banks recommend this, I think it is probably just helping avoid some human behavior issues. If they tell you to invest it all and the market crashes tomorrow you might blame them. If they tell you to DCA and the market rises slowly you probably won’t notice that you actually would have been better to lump-sum invest.

In general, I would say that there’s not a lot of value in the practice. At the moment, right now, however, I would point out that the market is a bit hot and is (IMO) liable to deflate at some point in the next year. It may be one of the rare points in time where it is worth holding on. Even if the market doesn’t correct, there’s a higher chance that it will stay flat - meaning that there’s little chance that it will be to your advantage to get in earlier versus later. The bank might be taking the state of the market into account when making their advice and, in other years, not giving that advice.

That said, there are investments like minimum volatility funds that aren’t overpriced and have a fairly good return (e.g. USMV). If there was a crash, it would come back fairly quickly - and certainly by the time you are looking to use your money - assuming that you’re investing this for a decade or more.

There are also bond funds. In general, these don’t have great returns, but they will start paying dividends and give you something for your money while also being fairly resistant to any risks in the market. (E.g. LQD) If you have dividend reinvestment enabled, you are - to some extent - gaining an element of the advantages of DCA.

If you can wait thirty plus years until you need this money and you can trust that you will never have an emergency need to pull from it then you’re probably safe to just put it into some high risk tech fund and mentally prepare yourself to stoicly ignore any long periods of your investments sitting at major losses. You can’t sell, and that money is just useless to every emergency in your life.

If you’re hoping to buy a house or something within the next ten years, I’d suggest taking one of the more cautious routes to enter the market, right now. BUT, you should note that this is temporary. Once the market has come back to a more reasonable value, you should be ready to swing your money over into better investments. (Though, that said, many will fail to ever do better than USMV, if you’re sticking to funds.)

Note: Not an investment advisor, just a random person who has done math and thinking of his own, free of any training. I make no guarantees in my advice.

Can’t one deal with that, to some extent, by buying put options?

There have been studies showing that dollar cost averaging, on the whole, does not lead to higher returns. That’s somewhat obvious. You are choosing between two investments - cash with a low expected return and something (like equities) with a higher expected return. Investing in the lower expected return investment for a while gives you a lower expected return. The studies say to maximize your investment by putting your money into the market as soon as you get it.

There are two big benefits to dollar cost averaging. If you earn money in dribs and drabs, like most of us do, it’s the best way to put money into the market as you get it. In that case, dollar cost averaging is also conveniently the way to put your money into the market in the most timely manner.

The other advantage is that it helps new investors commit to investing, even if there are downturns. A new investor might be too nervous to put all their money in the market all at once. Dollar cost averaging seems safer so the investor is willing to take the plunge and start investing. The investor can actually get excited about a dip in the market, because it means buying cheaper shares. Watching the market trains an investor what ordinary volatility looks like and they can see that a little dip might be followed by little recovery and thus the investor shouldn’t panic about small dips in the market. Dollar cost averaging also helps the new investor stay committed to the market when it drops. The last thing you want an investor to do is to put a bunch of money in the market, panic at the first big drop, and pull it all out at the worst possible moment. Committing to dollar cost averaging prevents that.

I have frequently recommended that new investors dollar cost average because it has seemed to me that equity market valuations have been historically high for most of my investing life (a couple decades now). That advice has almost never actually worked out in the sense that it increased people’s rate of return over investing right away (perhaps in 2007-2008, it did). However, dollar cost averaging helps to minimize regret, which new investors suffer from the most. If a new investor’s portfolio starts going up, they are generally happy, even if they missed out on some gains by holding some unnecessary cash for dollar cost averaging. If the portfolio goes down, the investor can at least console herself knowing that she avoided some losses by holding the cash and is increasing her return by buying some relatively cheaper shares.

Yes. But your average investor isn’t going to do that.

I’ll put SCHG against USMV any time.

I’d say no because of the expiration. You really have to time the market well or pay a lot in premium for something like LEAPs

Likewise, I could put up QQQ against that, TQQQ against QQQ, and Tesla against TQQQ.

I didn’t say that USMV has the highest return, I said that it doesn’t seem to be overpriced and that it performs better than your average fund. The others mentioned all pass the second criteria but only USMV passes the former.

There’s no particular reason that an index fund would be expected to deliver steady growth.