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dollar cost average effect

Institutions recommend dollar cost averaging because it keeps a regular stream of money flowing. For most small investors, it seems like a good idea at first glance, but the practical results are another matter. When do small investors usually become interested in the stock market for the first time? When there is public clamor and lost of talk and advertisement about advantages of stocks, and the market is high. But many, if not most, who begin a regular investment program eventually stop or even sell their holdings after a few years, or sometimes a few months, for one personal reason or another. And when is the greatest likelihood of selling? When the market is depressed. So what first looked like a plan of buying more shares when the market is low and fewer shares when the market is high turns out in reality to be a short period of being totally in the market when it is high and totally out of the market when the buying opportunities are good.

Reply to
Don
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Forgive my enthusiasm for Excel exercises. In the end, as long as there's an agree method, the results are usually indisputable.

Jan 3 2000 - S&P 1394.46 Dec 1 2003 - S&P 1111.92

Without adding back dividends, the market dropped 20.26%.

A DCA investor, investing on the first of the month, would have put in $48,000. The Dec 2003 value would be $48279. As the dividends exceed the expenses of any S&P index funds, the actual return would have been a bit higher. I'm sure one of the DCA papers would have discussed that while lump sum investing does produce higher results that DCA investing over X years must certainly reduce volatilaty. (Of, course both on the up and down side of the curve) Had the market simply gone straight up, the 1394 never to be tested again, well, of course you'd wish you bought it all at 1394.

JOE

Reply to
joetaxpayer

But there are many different interpretions/assumptions:

1) have a large lump sum. invest all at once, or spread out? 2) have a 401K. invest monthly or wait until you have a large lump sum to invest? 3) compare DCA against equal share investing.

All three have already been assumed in this very thread. A lot of articles use DCA concept to promote #2.

Reply to
Bucky

Elle wrote:

I think it's true. "Expected return" does not been actual return. From a statistical definition of expectation value, I can "expect" the stock market to return 10% every year. Statistically, DCA will reduce risk and reduce expected return.

Reply to
Bucky

well, that explains your first reply, because it didn't any sense. =) I don't think anyone here is talking about "buy equal shares". Most people are comparing against "lump sum". Again, back to my first reply about how pretty much all DCA arguments go back to what context people are assuming.

Reply to
Bucky

First of all, I will state the context: we're talking about investing an initial lump sum vs spreading it out over time.

It depends on your goals. On average, DCA will result in lower expected return than lump sum. However, on average DCA will also result in lower volatility of returns. So if your goal is to lower volality at the expense of return, then yes DCA works.

The author was probably just making the statement that on average, DCA does not result in higher returns than lump sum. Which I guess some advisors/brokers claim or imply.

Reply to
Bucky

Hi everyone, I wonder what would happen it one invest $200 and 2 weeks late $100 every month.

just wondering John

Reply to
Turtle

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