The article still neglects the fact investing is made of multiple
components. Namely holding time, return, and volatility. Greenhut's
assumptions are that the time period is very long and that investors
have no risk adversity. Using these assumptions he can site long-term
general market uptrend and pychological peace of mind to ignore two
important components and focus ONLY on return.

I can take the liberty of making unreasonable asumptions too. Assume
the client will stay awake for days watching his investment on a
ticker, biting his fingernails and contemplating death at the slightest
downtick. Also assume the investment is is being made in January '03
and HAS to be sold in a year. Finally assume the investment was
Healthsouth (HLS)!!! Sure this is unreasonable and probably violates
suitability but it is simply the opposite extreme to Dr. Greenhut.

The fact still remains that DCA mitigates risk adversity and holding
period exposure AT THE EXPENSE OF POSSIBLY GREATER RETURNS.

In an upward market Lump Sum = better return; in a downward market DCA
= better return - average risk being equal or not.

Tad Borek wrote:
- quote -

DCA of a lump sum is inferior to immediately implementing the target
allocations because it will lose on average to a fixed-mix allocation
with the same risk -- it is mean-variance inefficient. For example, if
one is initially 100% in cash and the target is 80% stocks, and one
moves to 80% stocks over 4 years, one's average exposure to stocks over
that time would be 40%, but simply investing X% of the portfolio
immediately in stocks would have higher returns for the same risk. I
think X would be close to 40, but one could read the academic
literature on DCA to get the correct answer.

The site I linked to earlier and the papers referenced there dicuss
this in more detail.

- quote -

It is true that if the DCA of the lump sum is done over a short period,
its deficiency is lessened. DCA mostly has value as a psychological
crutch.

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

just wondering
John

beliavsky[at]aol.com wrote:
- quote -

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.

joetaxpayer wrote:
- quote -

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.

- quote -

Elle wrote:
- quote -

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.

Mark Bole wrote:
- quote -

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.

- quote -

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

<beliavsky[at]aol.com> wrote in message
news:1165584582.552944.178480[at]f1g2000cwa.googlegroups.com...

- quote -


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.

Turtle wrote:
- quote -

John,
A slightly awkward but accurate way of saying it is: dollar cost
averaging assures that your average price per share will be equal to, or
lower than, the average price of the mutual fund over the period that
you stagger your purchases. This happens because you buy more shares
when the price is lower, when investing a set amount (e.g. $1000 per month).

DCA is a way of addressing market fluctuations when shifting from cash
into a volatile investment. Imagine a worst-case kind of scenario where
you happen to move a big sum from cash into stocks immediately before
the market drops 15%. There's no getting around it...your end-value is
going to be 15% lower than if you'd waited a week.

These kinds of dips are unpredictable. And even if nothing so dramatic
happens, stocks typically move up and down quite a bit during any period
(whether a day, a week, month, year). So DCA lets you accumulate shares
at a number of points along the way, assuring that if the market drops
then at least all your money didn't go along for the ride.

It's not just over a long period by the way. If you're buying 1000
shares of stock you might decide to dice it up into 100-share batches
during the day, rather than accept the price at a given moment.

As someone mentioned, DCA does lead to lower returns if the market rises
from purchase to purchase. I've seen statistical studies that show that
DCA "more often than not" loses to a lump-sum investment for stocks,
generally (something like 60% of the time), which makes sense because
the long-term trend of stocks is upward. But so what? I think most
people sleep better using DCA, if only over a relatively short time
period. And some of the time at least, the lump-sum investment loses badly.

-Tad

Hi everyone,
- quote -


That's the way I undertsand it now.
It does not mean you will more than the peson who invested only once in
that year but you will be better protected when your share have bad days.

I wonder how this worked out in the bear days from 2000 to 2003?

John

Dr. Greenhut is not wrong, but he neglects important aspects. He
refutes DCA by using percentages needed to correct to the center as
opposed to deviations from the center.

Under the heading "Pattern of Price Volatility" paragraphs 1 and 2 , he
uses $150 and $75 as his high and low price because they would both
take a 33% price movement to reach the $100 original price. Markets
don't work that way. Market movements are measured in percent change
from a particular price, not how much change would be necessary to get
back to that price. I've never heard CNN say "Today's market rose and
we will need a 5% decline to get back to yesterday's close. Back to you
Pat."

Greenhut's market shows a 25% market loss to purchase at the low (most
advantageous for DCA) and a 50% market gain (least advantageous for
DCA). Even at that point DCA becomes ONLY AS EFFECTIVE as lump sum, no
worse.

Anybody can make the numbers work in their favor if they try hard
enough. For ex: you started DCA at a stock price of $1 and it linearly
went up to $10 over a week , of course you would have rather lump sum
invested at $1, but you had no way of knowing that was going to happen.
If the price had linearly fallen by an equal percentage, you would much
rather taken DCA. Furthermore, Even if the stock ends the year 100% up
that one week would have made a huge difference with DCA.

DCA hedges against the RISK of market downturns, it does not claim to
nor will it always result in higher RETURNS. The two are a trade-off.
Most of the opponents are arguing scenarios with higher potential
returns, but at what risk did you take on those potential returns?
Anyone can find a penny stock that may return 10000% but the risk of
investment loss may also be 99.99%

You have to decide where your risk tolerance lies. If you think you can
time the market (not likely, no offense) lump sum it. If you don't want
to take the chance that your investment take a downturn early on, use
DCA.

Dave Dodson wrote:

- quote -

Since I don't know when the lowest price will be, I can take several
small shots at it instead of one big shot - a form of dollar cost
averaging.

It's not a question of minimizing or maximizing taxes -- I'm going to
pay the same fixed amount of income tax either way, but the question is
how high of a percent of my pre-tax IRA money can I convert to post-tax
Roth IRA money?

Incidentally, I don't want to mess with the paperwork involved in
multiple re-characterizations of IRA conversions, in case anyone was
thinking of that.

-Mark Bole

- quote -

Correct!

<beliavsky[at]aol.com> wrote
- quote -

To come to this conclusion, one also has to assume a
particular timeframe. In response to "When is dollar cost
averaging a good strategy?," the correct answer is, "It
depends... "

"John Gunn" <noway[at]forgetit.org> wrote
Elle wrote
- quote -

Investing in stocks for the short term (under five years,
say) is gambling. Even many newbies seem to understand this.

- quote -

No, this is not necessarily true. It will depend on market
conditions and timeframe.

Turtle wrote:
- quote -

If one assumes that financial markets are close to efficient, dollar
cost averaging is an inferior method of investing a lump sum, because
one's exposure to the stock market (or whatever asset class is being
invested) is distributed unevenly over time. This is discussed in
detail in

Mathematical Illusion: Why Dollar-Cost Averaging Does Not Work
by John G. Greenhut, Ph.D.
at http://www.fpanet.org/journal/articl...p1006-art8.cfm

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote in news:ap3eh.7915
$sf5.1279[at]newsread4.news.pas.earthlink.net:

- quote -


Except that it completly misses the mark by comparing investing with
gambling.

DCA is an effective way of reducing risk but will reduce the expected
return. Said another way it lowers the average return but tends to reduce
the impact of some of the bad events.

John

wyu[at]talisys.com wrote:
- quote -

You also would have maximized the income tax due on the conversion. You
would rather do the conversion at the lowest price of the year to
minimize the taxes, wouldn't you?

Dave

If you converted it all at once at the peak, would you also have sold
at the peak for maximum profit? Unless you're talking dumping the
entire conversion amount into a MMF in your Roth IRA and then slowly
moving that money back into other investments.

Mark Bole wrote:
- quote -