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Investing a lump sum by spreading it out over a period of time ('dollar cost averaging') has been shown to produce lower returns than making one large initial i

by gamble 18y ago

Investing a lump sum by spreading it out over a period of time ('dollar cost averaging') has been shown to produce lower returns than making one large initial investment. Most experts regard it as a marketing gimmick used to ease nervous customers into investments.

comatose_kid 18y ago
Really? That is a surprising outcome, and would seem to be dependent on when that large initial investment was made.
- pfedor 18y ago
  I'm pretty sure he meant "on average." And it's hardly surprising, since the market on average goes up. Dollar cost averaging decreases your expected value while also decreasing the standard deviation (risk.) I don't know the result gamble was referring to, but I'm guessing he meant that if you wanted to decrease your risk, then the better way to do so is by adjusting your stock/bond ratio. For completeness I'll mention that there's also a strategy called "value cost averaging", which gives better returns than dollar cost averaging but is less straightforward to implement, you need to keep a spreadsheet and do some calculations--the basic idea is that instead of investing a fixed amount of dollars every period of time, you invest the amount needed to keep the value of your portfolio growing at a certain rate (i.e., you buy more when the stocks go down and less when they go up.)
nostrademons 18y ago
That assumes that you have all the money in the beginning, correct? Makes perfect sense in that case - the market goes up on average, so if you invest early on, you get a better price. But most people don't have a large pile of money sitting around, and earn it over time. AFAICT, dollar-cost-averaging gives you a better return than the alternatives of buying a certain number of shares monthly, buying the best performing stocks, or holding all the cash and investing it when you think it's a good time to invest.
- gamble 18y ago
  Yes, the term 'dollar-cost averaging' tends to be overloaded. Strictly speaking, it refers to a strategy where you start with a lump sum and invest it in chunks over a period of time, rather than at once. Some people have extended the concept to periodic investments, like you might make in a 401k. In that case, there's really no reason to sit on your money rather than investing it as you go.

by gamble 18y ago

comatose_kid 18y ago

Really? That is a surprising outcome, and would seem to be dependent on when that large initial investment was made.

pfedor 18y ago
I'm pretty sure he meant "on average." And it's hardly surprising, since the market on average goes up. Dollar cost averaging decreases your expected value while also decreasing the standard deviation (risk.) I don't know the result gamble was referring to, but I'm guessing he meant that if you wanted to decrease your risk, then the better way to do so is by adjusting your stock/bond ratio. For completeness I'll mention that there's also a strategy called "value cost averaging", which gives better returns than dollar cost averaging but is less straightforward to implement, you need to keep a spreadsheet and do some calculations--the basic idea is that instead of investing a fixed amount of dollars every period of time, you invest the amount needed to keep the value of your portfolio growing at a certain rate (i.e., you buy more when the stocks go down and less when they go up.)

nostrademons 18y ago

That assumes that you have all the money in the beginning, correct? Makes perfect sense in that case - the market goes up on average, so if you invest early on, you get a better price. But most people don't have a large pile of money sitting around, and earn it over time. AFAICT, dollar-cost-averaging gives you a better return than the alternatives of buying a certain number of shares monthly, buying the best performing stocks, or holding all the cash and investing it when you think it's a good time to invest.

gamble 18y ago
Yes, the term 'dollar-cost averaging' tends to be overloaded. Strictly speaking, it refers to a strategy where you start with a lump sum and invest it in chunks over a period of time, rather than at once. Some people have extended the concept to periodic investments, like you might make in a 401k. In that case, there's really no reason to sit on your money rather than investing it as you go.