I always thought that dollar-cost averaging was stupid

[Zugzwang152]

Originally posted by: dullard
Of course, don't be an idiot and do DCA in stocks/bonds a non-retirment investment account as the fees would eat you alive.

It really depends on how much you're investing and whether or not you pay fees. For instance, if you had $25k at Zecco, got your 10 free trades per month, and had a good chunk to invest regularly per month, why would you not DCA?

Or alternatively if you didn't have free trades but had a large amount to invest per month (say you're at Tradeking paying $5/trade but were investing upwards of $5k per buy), the advantage of DCAing would far outweigh the fee.

 

[rchiu]

1. How much do you value your time to read the trend every day trying to decide if it's time to invest.

2. How good are you in making sound investing decision. If you were Warrant Buffet, timing the market with you vast amount of knowledge is probably a good idea. But if you are a noobie without much experience or knowlege and can't handle the market up and downs, I would advise against timing the market. In that case, DCA would be better.

 

[TheoPetro]

Originally posted by: dullard
1) First, most of us don't suddenly have a large lump sum of money to invest. If we did, we should have invested it with DCA months/years BEFORE we wasted the time waiting for it to accumulate into one large pile so that we can invest it in one lump sum. In other words, in a market that goes up is it better to invest $1000/month now or to wait 12 months until we have one large lump of $12,000 to invest? That is, DCA usually means you invest SOONER. When a market is going up, the sooner the better, thus DCA is better in this case.

I hope that I just threw your argument into a 180° loop. The only time that you can do lump sum investing sooner is if you get a sudden windfall - and that just doesn't happen very often. Yes, if you do get a sudden windfall, you MAY be better off investing it all right away.

2) That is, unless the market is flat or if the market is going down, or if the market is in a roller coaster. In all of these three situations, DCA is often better than lump sum (unless you happen to be lucky and time the lump sum at exactly the roller coaster bottom). And we know how poor market timing is.

3) As said in other posts above, DCA helps get people to invest (better emotional control). A little at a time is easier to swallow than a lump sum. If they wait weeks/months deciding where/when to invest the lump sum, then they miss the market gains that the DCA would have given them during that time.

4) DCA gives you flexibilty. It is easier for most people to do DCA and place individual investments in CDs, money markets, their mortgage, bonds, mutual funds, individual stocks, etc. It is harder to figure that all out in one lump at the same time dealing with many different organizations. Or what if you have a sudden need for your money. With DCA, you might not have invested it all yet and face the selling fees/penalties to get your money back out.

But, ultimately you are right. If you happen to have complete emotional control after your windfall in an bull market with proper market timing and a good strategy THEN you are better off in a lump sum. That happens to be a few too many IFs for most people though. Of course, don't be an idiot and do DCA in stocks/bonds a non-retirment investment account as the fees would eat you alive.

Im not saying you should save up until you have X to invest. For some people most of their pay comes form bonuses paid annually or semiannually. Some people get a decent amount of cash when they sell a house. In these situations I would advise lump sum investing (not trading) which goes into your second point. It doesnt matter what the heck the market is doing because your investment horizon should be years, not days. If youre investing for days then youre trading. Same thing with your third point, youre talking about timing/trading, im talking about investing. Who cares if you miss out on a small gain or loss in the first month when youre not planning on taking out your $ for 5-10 years? You dont need complete emotional control and a windfall and the ability to time the market to invest properly. You need to know some economics/finance and do your homework. If you dont feel comfortable investing 50k now then why the hell would you feel comfortable investing it over a year? The fact is DCA gives people who shouldn't be managing their $ an excuse to be involved in it. I have a "fun" account that I play with but if it tanks its not going to hurt me. My "real" account I leave to an advisor because, like I said above, I dont have the time or expertise to do it correctly. If you want to play around with DCA thats your choice. IMO its retarded unless youre doing it for the company match in a 401k.