Comments on: 3 Investment Principles Every Young Person Should Know: #3 Dollar-Cost Averaging

By: Anon

Anon — Thu, 12 Mar 2009 20:14:35 +0000

Most of the time Return and Risk are proportional. The lower the risk the lower the return, hence CD’s and T-Bills are low risk and low return and Stocks have higher risk and higher return. Investment strategies tend to work the same way.

By: Larry Clockwant

Larry Clockwant — Mon, 24 Nov 2008 01:10:23 +0000

Now is a great time for buying stocks.

http://www.youtube.com/watch?v=xKlMl4II3_0

By: Dividend Growth Investor

Dividend Growth Investor — Wed, 21 May 2008 17:37:55 +0000

DCA outperformed the market in only 20% of the years.
That sounds like a bad strategy to me. Of course, you could have invested at the top of the market in 2000 in a lump sum, versus DCA-ing, but if you look at the results year by year, as I did, it seems like DCA reduces the risk while also minimizing return..

By: Cameron Schaefer

Cameron Schaefer — Sat, 16 Feb 2008 00:12:21 +0000

Interesting. I have two thoughts. First, while you’re spreading out the regular interval by investing once a year, its still DCA in the sense that you’re making purchases at a regular interval regardless of share price, whether its once a month, or once a year. True buy and hold would be purchasing X amount of shares of VFINX in 1988 and holding them until 2007 (not purchasing anything in between) vs. purchasing shares at regular intervals during that 20 years adding up to X amount. I would be interested to see the results of this comparison.

Second, buy and hold is completely dependent on timing the market. For example, if an investor bought $1200 of VFINX sometime in 2000 and held them until present he would be far worse off than the investor that spread out the $1200 over the 8 year period, making multiple investments along the way…this obviously due to the popping of the dot com bubble in 2000. You could also find time periods when buy and hold would crush DCA (like from the bottom of the 2000 bust until present)…but again, buy and hold is completely dependent on timing.

Now, I admit that DCA works out best when there are some large dips in price in the midst of long term positive growth. Without some good dips in price during your investing time frame then buy and hold beats DCA hands down. The problem, as you pointed out, is that few actually have a large sum early on in life to be able to plop down in the market. I think that’s probably the core issue which makes DCA such a good idea.

I completely agree with your last statement though. Always better to have money working for you in the market regardless of investing method, rather than not investing at all.

Interested to hear your response…I admit, I still have a lot to learn when it comes to investing so I welcome the debate.

By: Dividend growth investor

Dividend growth investor — Fri, 15 Feb 2008 21:30:26 +0000

I think that DCA is an inferior strategy. If you follow the link to my website, you will see that over the past 20 years DCA has produced inferior returns to a lump sum buy and hold. You decrease your risk with DCA, but you also decrease your return. Once again, no free lunch on WallStreet.