There is another thought that I toy sometimes. Invest your LS into decent money market like fidelity cash reserve and take the interest/dividend and invest into a stock portfolio. this approach is good for mid career to already retired. May not be good for those who have lots of time.

Why is everyone completely ignoring the following tidbit that Howard from Boston posted?

“One merely need look at the Nikkei average and consider the effects if you followed the author’s advice and it was the late ’80s or early ’90s - you’d still be underwater…20 years later.”

What about 1966-1982 in the US markets?

I would submit that if one is 10 years or less from retirement, capital preservation is king.

His “point” is that the mathematical expectancy is better if you do a lump sum instead of DCA. This is not a very interesting or compelling argument to actually advocate a course of action. Would he recommend that no one should waste money on insurance for their car, home, etc because the mathematically expected outcome of buying the insurance is a loss? DCAing over a year is done simply to avoid the psychological disaster of catching the market just before a 50% drop.

You don’t build up a cash stockpile and then dollar-cost-average: you invest as you actually receive the cash if it’s coming in on a regular basis, which is what DCA really means.

If you do receive a large lump sum, you should invest it right away as soon as you’re sure of your investment goals and have found the appropriate investments to meet those goals. You are guaranteed to lose 3-4% due to inflation if you hold on to a large sum of cash.

Ronnie: The appropriate question is not how you should invest the money, but should you?

My advice to you would be to do the following, in this order:

1) Pay off all consumer debt (credit cards, car loans, non-primary mortgages, personal loans, etc)

2) Keep 6 months of living expenses in the Money Market account (as your emergency/layoff fund).

3) invest in a tax-favorable account (401k, IRA, SEP-IRA) up to your yearly maximums. You still have time to make contribution to a 2007 IRA (up till April 15, 2008).

Chances are, there will be nothing left over after doing the above anyhow.

4) But, if there is anything left over, then either LS the rest into an age/risk appropriate low-cost index fund.

5) Your ongoing monthly contributions to the index fund can then be DCA’d in — as in automatically deducted from your checking account after your payday.

The point I am making here, is that you should not invest 1 cent, until you have done #1 and #2 above.

Some things you can look the psychologically benefits more than mathematics side.While the returns of lump summing money at all once will most likely be higher than DCA over long term investing horizon,markets over short term time periods can be very volitale.

If someone decided to lump $100,000 in on Jan 1 2000,2 years later,they would have been shell shocked,and proboly would have had some negitave lasting scars or would have dropped out of stock market investing completely and said I will never do it again.

I think DCA creates in a persons mind a win-win feeling.if the market goes up-my portfolio rises.If the market drops,I just bought shares that just went on sale.I think with most people it’s about keeping them in the game,it’s more about reducing risk or being shell shocked,if a person lumps sums in and they lose 25% of their money in 6 months,and then they get very negitive about market and drop out,then lump sum in was failure.

“Time in the Market” is a better strategy than “Timing the Market.”

All of these scenarios about getting in at this point of that point in the past are rediculous. Think for yourself and you will see that Updegrave is putting forth basic common sense here.

DCA with a 401K, go with a lump sum most of the time in “normal” financial times. With all the mess in the financial markets now, DCA in with a lump sum, dump more in on the market dips. You’d be crazy to put 100K into the markets today if that was all or nearly all of your retirement savings outside tax deferred accounts. We’re going nowhwere but down for a while folks.

If market volatility is minimal and share prices are expected to rise more or less in a straight line then DCA would be no better than a lump sum investment(assuming you have the lump sum).If market volatility is high then DCA should win out over the long haul because you would in fact end up buying more shares when prices were low, thus driving down the average cost of shares owned.This, of course, only applies to certain mutual funds bought directly through the company.The transaction costs incurred buying individual stocks or ETF’s would destroy any returns.Individual stocks or ETF’s should be purchased on a lump sum basis.

This is a pointless argument. If the market goes up 30% on monday than dolar cost averaging was the wrong method. If it drop 30% on monday it was the right method. If you can predict the future enough to know that you could easily make billions day trading so there’s not much point in long term investing. Flipping a coin gives you the best odds.

CNNMoney, shame on you for posting this article, it is misleading and does not have anything beneficial for the reader to apply to their real life. There is no reason someone who receives a lump sum not to dollar cost average. It is simple, and lowers investment and timing risk. Why take a chance with a bigger lump sum that you will invest at the top or the bottom? DCA is almost always in the best interest of the client for a long term investment.

Walter, For what it’s worth, I’m an actuary and I agree with you 100%. It looks like this really hit a nerve with people. Reading some of the comments, my mind keeps remembering the phrase “a little learning is a dangerous thing”.

I don’t know if saying something one more time will really help the situation, but here goes: Rebalancing to a target asset allocation allows you to buy low and sell high. “Dollar cost averaging” is just a synonym for adopting a hyper-conservative target allocation that becomes more appropriate over a short time horizon.

This is the funniest bunch of comments I’ve ever read…”the author is wrong!”

The author is expressing a well informed opinion. If you are extremely risk averse, then DCA into the market over 6 to 12 months, his point is that there is no financial argument that this is a preferred course of action for a lump sum that will be left alone for 5 to 10+ years.

“What if you had invested that $60k all at once in a diversified mix of stocks back in, say, March of 2000? Ugh! ”

Stupid argument that misses the point. What if you had started DCA’ing the 60K in September of 2002? UGH? You’re better off DCA’ing if the market is going to be trending downward during the DCA period, you are better off lump summing if the market is heading up during that same period. So, essentially, when you choose to DCA or LS an amount, you are betting that the market is going to go up or down during that period. Now since the DJI is worth 284 times MORE than it was in 1932, and not the opposite. I’m placing my bet that during any given period, it is more likely to be trending upward than downward.

I think this is the right time for dollar cost averaging if you want to get into the market now. No one knows whether the worst is over or there is another leg down. The market could move up 500 -1000 points in a few days or weeks. Like wise it could go down. Buying during one of these moves is difficult for most people.

You do want to catch a falling sword as the professionals say and it is phsychologially difficult for some people to buy into quickly rising market becasue you never know when it will re-trench 30% - 50%.

If you believe that over the long term the market will go up and you want to be in equities then you dollar cost average over a year long period

Don’t buy into journalists whose job is to simply write articles to sell magazines.

The journalist doesn’t even have to be correct - just come up with 1000 words on something. Then they call themselves “experts”? Please!

Naive thinking like the author’s is generally seen during bull markets - especially at the height of a bull market where people think things will just continue going up, so it doesn’t matter when you “get in” just that you do get in…now.

One merely need look at the Nikkei average and consider the effects if you followed the author’s advice and it was the late ’80s or early ’90s - you’d still be underwater…20 years later.

The author is simply wrong - think for yourself.

I thought the article was interesting. I’m not sure how people came up with some of the comments. His example was very clear. If you want a 60/40 split, taking the plunge achieves that, anything else is more conservative. He clearly states investing periodically such as to a 401k from each paycheck is not what he is referring to.

Wow. I manage money for a living, and continue to be astounded at how little people know about the basics. Even a CFP’s comments show that he doesn’t understand Walter’s explanation! There are excellent studies available (try google) on the pros/cons of dollar cost averaging. But there simply is no argument that long term money should just be invested as a lump sum (in the event that you happen to have a lump sum). It’s a coin flip, the market will either be up or down in the short term, but will certainly be up in the long term. Even the fella below who referenced investing at the peak in 2000…guess what? You’d be up!! It wouldn’t matter if you DCA’d or not.

Salary deferrals to a 401K aren’t what this article is about…but clearly most people can’t read, or understand what is being explained. Which probably explains why I make a good living helping folks.

Dollar cost averaging violates buy low and sell high, if one has the discipline to save in a plan one should allocate contributions to money market or thrift and wait for equities to fall and purchase at that time.

it’s interesting to note how many people look at return as something you gain or lose..

in fact until you sell you have done neither..

it’s like this mortgage crisis..
if you are financially able to pay the bill.. it doesn’t matter whether home prices went up or down.. as long as you can pay the bill you have neither gained or lost..

until you sell you haven’t gone anywhere..

so i agree with Walter Updegrave..

in for a penny or a pound only matters WHEN you sell..

To everyone against DCA: Do you not have a 401k? What do you think you are doing everytime you contribute?

The time frames in this article are non-ideal. The hypothetical person has had money sitting on the sidelines for quite some time in order to amass $60K (unless they robbed the 7-11 across the street last night). They’re clearly supposed to be investing for the “long-term”, meaning 5-10 years at minimum. Given the slow start on investing and the long-term focus, how likely is it to matter whether it takes 1 day or 1 year to get the money in with a 5+ year time frame? Investing in 1 day would lead to a slightly better return more often than not, but at slightly greater risk. The 60-40 stock-bond mix suggests they aren’t terribly risk tolerant to begin with, and thus I would say DCA might actually be less intimidating for them. Either you’re risk-tolerant, or you’re not, and our hypothetical person appears the latter.

You’re making the argument by using a lump sum amount as an example. Suppose you don’t have a lump sum, then dollar cost averaging would work. Also using a modified approach, that is investing at fixed intervals, i.e. every month and then increasing your investment slightly if the fund goes down, thereby buying more shares that month.

One thing I haven’t seen in these comments is something I saw mentioned by Jane Bryant Quinn a few years ago. When the market moves it tends to do it in big steps. Although the average return may be 10%, it tends to be relatively flat with sudden jumps. In the history of the market the gains have occurred over a handful of days, relatively speaking. Quinn’s argument for investing a lump sum all at once was that when the market moved, you wanted to be fully invested. (Yes, I understand that it can also suddenly drop, but historically the big rises have outweighed the big drops.)

Finally, someone outside the academic finance community is acknowledging the obvious: dollar-cost averaging is a bad idea. All of the objections to this article are missing one of the key points: the idea is that as long as you think that market returns are not predictable, for any dollar-cost averaging strategy, you can achieve better risk-return tradeoff using a properly chosen asset allocation on day one. Objections based on what would have happened if one where to invest right before the crash are misguided, since we can only talk about average returns and risk, not about ex post outcomes. It is also critical to make sure before comparing expected returns that the asset allocation choice has the same risk as the dollar-cost averaging strategy. In other words, it is all about the tradeoff between risk and return, there is no point talking about either one in isolation. In conclusion, I just want to add that the fact that the dollar-cost averaging strategy is inferior under the assumption of no predictability in stock returns is a mathematical fact. It is a simple issue, it has been well understood by academics for many years. One cannot disagree with this, it would be like disagreeing with the fact that 3 times 4 equals twelve. One can only disagree with the asumptions: either one must believe that market returns are predictable, or that expected returns and variance are not the right measures of performance. Both objections could be raised, but that would be a much more subtle topic.

He is correct in the sense that the expected value of investing everything immediately is better than dribbling it out - quite simply because on the average, the stocks will do better than cash. However, let’s carry the idea to its extreme. If someone came up to you and said that they would bet you everything you had on a coin toss - they would give you $1.01 for every $1 that you have if you won, but you would lose EVERYTHING you have if you lost the coin toss. Would you take the bet? According to Walter, yes you should, because the expected value of winning is greater than the expected loss of losing. The problem here is that the “expert” doesn’t understand risk.

I’m not sure DCA works nearly as well as it did in the past. I don’t think anyone in the investment community can talk about long-term investing without busting-out laughing. In this electronic age, investments are held for days and minutes. Long-term investing has gone from a common practice in the past to mostly a myth today.

Nobody has mentioned dividends — by investing a large lump sum you will be
receiving dividends on the full investment, whereas dividends will be
minimal if you use dollar-cost averaging.

This article examples some flawed logic. The illustration you give is a demonstration of the effect on an entire portfolio. Most discussions of dollar cost averaging focus on a single given specific market investment - like an individual stock or mutual fund.

In any given specific stock whose value goes up and down, your probability of having “gaining” purchases goes up if you buy 1/12 of your total in 12 transactions than if you buy 12/12 at the same time.

In your recommendation - you would be 60% invested in the stock market. If the market tanked, you’d be much worse off than if you had entered the market with dollar cost averaging. If the market consistently rises throughout the year such that you happened to make your big purchase on the lowest price day - you’d have a great year. Dollar cost averaging puts you somewhere in the middle - reducing some potential risk and reducing some potential reward.

This is bad advice given the current downward trend of the stock market. If I had invested my money in one feel swoop six months ago, I would have suffered terrible losses. As it is, I’ve been investing 1/12 each month and I’m SO HAPPY that I’m now buying shares that are cheaper now than they were then.

I think what Walter is really saying here is that now is a good time to buy.

He is more or less correct in his advice. If you have a lump sum, just invest it (diversify if it is a lot; say $5,000 or more). If you do not have a lump sum or are just starting out with investing, start an automatic investment plan (AIP). Mutual fund companies typically will do this for as little as $50 per month and even waive the minimum initial investment (sometimes $2500 or more) most of the time when you begin an AIP. It is an excellent way to take emotion out of investing and keep yourself on track.

So put down your $3.00 a day coffee (that’s $60 for a month’s worth of business days) and start thinking about your retirement and future. The sooner the better.

Amazing how many people simply can’t or won’t read the article before running off at the mouth/keyboard. A little practice at reading comprehension would be appropriate for most of the people posting here.

I came into a lump sum of cash a little over a year ago and decided to not invest it all it once. My strategy has been to ladder CD’s that pay monthly dividends and use the dividends to increase the amount of my dollar cost averaging.

I am so glad that I did! So far I have outperformed the major indexes while increasing exposure to the equity markets.

Following this articles advice would have led to significant loss…..

I’m not a financial expert but wanted to share my experience.

I would advise reading up much more on the pros and cons if you are a beginner. DCA is an excellent tool for those who invest small amounts regularly, and do not follow the market. If you are diciplined enough to put a percentage of your salary away constantly, then through DCA you will always come out ahead in the LONG term, as the market fluctuates…. basically going on sale. You still should watch daily market trends to get the most out of your DCA contributions.

SERIOUSLY- that was a waste of my time, your talking about investing your money in a long-term portfolio, and then your worried about the next 12 months! Who cares, either way it was the best thing todo long-term! Over the next 12 months? Who’s to say? DCA’ing is the best way to invest because it tricks people into saving more, and best of all it takes away their WORST ENEMY…THEMSELVES, and the media. And if there’s a significant correction….CUT another check!

Thats the first thing I thought of when reading this article. Why didn’t he invest that 5k each month or at least a portion of it into the market rather than building it up in a bank acct?

Fascinating article. However, my understanding of dollar-cost averaging is that it is a phenomenon rather than a strategy—just like compound interest. The main purpose for discussing DCA is to dissuade people from not investing during a downturn.

The ‘expert’ is exactly right. Understanding the distinction between having a lump sum (inheritance, capital gain, etc.) or a periodic sum (paycheck, etc.) to invest is key to understanding this article.

Walts article makes sense the way he puts it. However his argument is built on one fundamental problem. DCA works for people who can afford to invest just a little bit each month. In this scenario DCA works better in the long haul, much more than one year. In the article he uses investors who have a lump sum. In that case he is correct, but you wouldn’t use DCA with a lump sum. Look at it this way, if a football player wears his uniform on the field and a suit to church that is quite appropriate. If the football player wore his suit on the field, and his uniform to church, he would be, like this article, viewed as more than a litte inappropriate.

Historically speaking - DCA is on average, a losing bet considering average annual market returns of 10%. Would you rather invest a lump sum at $100/share - Or spread it out buying at $100, $101, $102, $103, etc? Basic math.

Investing all at once allows an individual to have their funds in their desired portfolio for a longer period of time. (This assumes the portfolio chosen is appropriate for the individual). Economists have begun to examine the role of emotions on business decisions. Individuals generally weight losses and the potential for losses more than they value gains. Individuals with nest eggs may be unable to invest them all at once because they fear getting in the market at the wrong time. Walter’s strategy makes sense if the individual allows himself to implement it. If the individual is unable or unwilling to put the money in all at once, DCA may allow them to move the money into their desired portfolio-it will just take a little longer. For a period of time, they will have their nest egg in a portfolio which is more risk averse than their target. It may not seem logical as anyone who already has money in a portfolio is in effect reinputting the entire sum into that portfolio every day by not removing it. However for some, the alternative which is to allow their fear of the market timing to delay moving the money may be even worse.

Lump-sum investing is an attempt to time the market (which only works half the time). If you dump your money in before the market goes up, then you win, otherwise you lose.

Dollar-Cost-Averaging the money in over a time frame guarantees you the AVERAGE stock price (or index) over that period of time. DCA is investing your money without trying to time the market.

Wow, you are all missing the point of LONG TERM investing. Why should you be afraid of buying at a short term peak? As the article indicates, if you are in it for the short term you have no business in the market to begin with…stay in cash. If you are investing for the long term and have a lump sum, put it in the market - TIME is your best friend, not just an entry point. And Mr. CFP who previously posted, I hope you don’t put all your clients in index funds (unless they want to match the market, not BEAT it).

I tend to agree with the author. I don’t care what you call it. Investing newly saved money on a regular basis is an excellent idea. On the other hand, when investing a lump sum from an inheritance or simply an asset reallocation, I think it’s certainly ok to take the plunge at one time, particularly if the market has dropped considerably from it’s highs. There’s no solid answer to this question, since the only way to judge each situation is by using hindsight, which is always 20/20. In today’s world, I would opt to invest at one time, but that’s just me. I would rather be in equities than sit in a money market, hoping that equities don’t go up at a higher rate than the money market.

The author’s point is that DCA isn’t the holy grail. Usually, lump-sum investing gives you a slightly better return as on average, the markets are increasing. Sure, one can point to certain times in the past where DCA was better, but there were more times in the past where lump-sum investing was the better option. And since you can’t tell if today is one of those times or not, statistically speaking, you have to assume the average which favors lump-sum investing.

Also, some people will see that money sitting in the bank account and spend it instead of investing it. So it’s better to get it out of their sight via lump-sum investing.

Others will be so hesitant to invest in a lump-sum they’ll never invest at all. In this case, DCA is better for them. Most of the replies here are from people who aren’t comfortable with lump-sum, whether they admit it directly or not. And that’s fine.

It’s really about what you feel the most comfortable doing. But if you can handle it, lump-sum generally provides better returns. If you can’t handle it, DCA is another good way to invest.

The fact of the matter is that DCA helps you lose less money in a down market. It also prevents you from reaping the full benefits of a rising market. If you believe the general trend of the market is up (there’s about a hundred years of evidence to back this up), then you have NO REASON to use DCA. The only reason to use DCA is if you want to start investing slowly or if you enjoy forking over transaction fees every week/month/etc.

Look up “dollar cost averaging” in google or yahoo, and you’ll find a two types of articles. Those written by INVESTMENT COMPANIES (those who make money when people invest) and those written by JOURNALISTS and ACADEMICS (those who don’t make any money when people invest). The INVESTMENT COMPANIES will advocate DCA because it creates more transactions and more transaction costs. JOURNALISTS will usually write about DCA without any bias. This writer falls in that category.

People! People! The REAL POINT of Dollar Cost Averaging is to generate commissions for brokerage firms. By making regular smaller investments you become a regular and unwitting profit center for companies selling investment tools. You could just as easily study the market carefully and invest directly in stock at ANY point in the market and make a better return than you would by DCA, but the industry will not tell you that. DCA is the lazy man’s investment strategy and creation of the investment industry

At the end of the day, your best bet is to go with your gut. I honestly felt in early to mid 2007 that the downside risk in the US stock market was a lot higher than the upside potential. Obviously I was right. But I didn’t sell now I have to wait who knows long to get back to where I was. The “Experts” say don’t try to be a Market “Timer” Well what is Walter’s LS investment advice? Sounds like trying to time the market to me! Go with your instincts on this one. Forget the Experts, they make more $$$ when you leave yours in the market for them to play with!

In some ways I agree with Up. Take it from someone who’s been DCAing for YEARS and have constantly missed out on good returns. Why? Because on the day my funds purchased, the market was on a super high. Yes, over time my portfolio has returned, but not if I had posted lump sums over the days I had idly watched the news and bought shares during “down day” markets.

DCA is for those with not enough to purchase all at once true, but that is no longer for me. Stop giving DCA as advice…folks are losing precious returns.

DCA is a win/win, especially in times of market volatility. If the price of the stock/fund falls, I am able to buy more on the next purchase. If the price of the stock/fund rises, the whole investment is worth more money. Good and Better. No second guessing allowed, and thinking about the hindsight of if only I had done….

The key point to know as the price falls, is that over the LONG TERM the share price WILL increase. This is the opportunity to buy it on sale. The other point to remember is that if you liked it at the beginning, keep liking it. Stay with the automatic program and keep it going. Trust the decision made at the beginning of the plan, and stay with it. This plan has served me well over many years of ups and downs in the market. I cheer every day, as I’m always a buyer, and rarely a seller.

I don’t agree with all the criticisms but I do think you should rethink (or reword) some of this column. When you say, “I’m not guaranteeing that my method will lead to higher returns. But neither can the advocates of dollar-cost averaging. The returns you earn will depend on the financial markets. If the stock market surges, then putting your money in stock funds immediately will generate a higher return than investing in dribs and drabs. If the market heads south, the opposite would be true” that’s a bit of a straw man since generating max returns is not the point. It’s to reduce risk. And yes that means also it’s about the emotions. You don’t want to put 60K into stocks on Monday and have a 9/11 or Dot Com bubble meltdown happen on Tuesday. Those are extreme examples, but more modest meltdowns are also things to avoid. This reduces risk of something so paintful (losing a third of your $60k in the first few months, for instance) that it would mess up your will to invest (or invest right) in the future.

Think of it this way.

If in an inheritance you received 100k in Stock and bonds in the asset allocation you wanted (say 60/40) would you sell those MF so that you could DCA into them over the year? But you would DCA if you received the 100k in Cash? What’s the difference? There are no tax consequences in selling because the cost bases are stepped up.

In 1988 Dr. Michael Edleson published “Value Averaging”. An updated edition came out in 2006. Dr. Edleson spent decades studying dollar cost averaging (DCA) vs. other methods of investing such as buying a constant number of shares each month (CS). His studies show indisputably that DCA affects returns considerably. Value averaging (VA) is a more sophisticated version of DCA and produces even better returns. Edleson proves this again and again. He further states that the only time a lump sum should be invested all at once is if the market is a generally moving upward one.

Whether DCA or VA is used, Edleson’s studies show that investing quarterly rather than monthly invariably produces greater returns over time.

In this instance Updegrave’s response is inadequate, especially for an investor who is obviously seeking a little enlightenment.

I recommend Edleson’s “Value Averaging” book. It will serve you for life.

Updegrave is correct. Cash should be invested as it becomes available. Mr McDonough made a very insightful comment a few posts below. I encourage someone who favors DCA to respond to it.

Scott from Raleigh is righr - read the entire article carefully. Most of the comments posted are completely missing the author’s point. I have, like most others, dollar cost averaged for over 30 years with superb results. The author is not disparaging DCA, he is talking about one lump sum - and I believe he’s right. What he’s saying is to properly diversify and invest the lump sum immediately so the money can go to work with risk managed through the diversification.

I am not sure what makes Walter an “expert”. This article certainly is not the stuff one would expect from such. The question was more about the current state of the market. A simple, logical question. You took that as an opportunity to try and prove you are worthy of your self-proclaimed title of expert. DCAing works. LSing works, too. You should have tried to help this person, not confuse them more. Slamming “advocates of dollar-cost-avging” gets you what? Gets the readers what? This was a market timing question and you turned it into some kind of bonus question on a math test. Oh and another thing…40% bonds? Ever heard of real rate of return, Walter? TSK,TSK.

YOU ARE ALL NUTS! IT’S TIT FOR TAT AND HALF OF YOU DIDN’T READ THE WHOLE ARTICLE BEFORE BLASTING IT. I’M NOT ADVOCATING EITHER APPROACH, BUT IT’S MORE FRUSTRATING TO READ THESE COMMENTS WHEN YOU AREN’T EVEN COMMENTING PROPERLY.

If you want to make money and want to use Dollar Cost Averaging only do it when markets are moving up. It is better to chase a market moving up then chasing one moving down. It is harder to recover from a loss in the market then to accept a slightly lower upside if the decrease to downside is minimized. The conclusion you should come to is that you cannot predict when a market will turn back up again, but you can take steps to lock in a profit even if you do it prematurely.

Investing is a personal thing, experienced investors have a plan. New investors need a plan. I belive the article was intended for a new investor that would learn more over time. Considering that, I agree with the author’s advise. Would I modify it for myself if I got a $60k lump sum, probably. Where are the stock markets now ? Well that is the history that follows.
2-05-2005 Dow Closed at 12,265 52wk high was 14,280.00 14.11% =down
2-05-2005 NAS Closed at 2,310 52wk high was 2,861.51 19.29% =down
2-05-2005 S&P Closed at 1,337 52wk high was 1,576.09 15.19% =down
Therefore about 15% below their 52 wk highs, so it is a good time to lump sum invest. Obviously !
How complicated of a system can that new investor handle ? Lumping now is simple and will positively work out over time. That is a FACT. Is the market going up or down, how much, when ? If we knew that we would not be here reading or typing right now.
So is averaging in better, maybe he could buy some lower, but maybe not.
But lumping in now will work ! Will the markets move down more first ? I would guess so, but it is just my guess. If they do, will it be another 15% ? Possibly, but I would bet against that. Might they go up another 5% before going down another 15%, I would take that bet. But NO ONE KNOWS ! Unless you have a functionally working crystal ball, NO ONE KNOWS where the markets will go or when. If lump sum invested with planned allocation, you are in ! Big market swing up DUH, rebalance. Big market swing down DUH, rebalance.
Old market saying, there is room for the bulls, and room for the bears, but NO room for the Piggies !
The only advise I would add, my personal whim. Stocks, Mutual Funds, ETf’s whatever, & CASH (Money Market), but NO Bonds right now. No bonds till rates are back up on treasuries (10yr above 5%). Hope this is of value to any new investors like the article was intended for. If you want a more involved plan, system then go pay for some financial Guru to manage your money and hope he does better. Cheers and profits to all.

Ya you would look like a genius if you put all $60,000 in the mrt back Oct 31st.

Stick to dollar cost average and sleep at night.

Some folks have said this but some DCA of a LS makes sense because of reduced volatility. If you assume the stock market swings 2% on AVERAGE each day and return 10% per year on AVERAGE. Cash does not swing at all and returns 5%. So the switch to stocks is worth an extra 5% return on AVERAGE. The longer you delay investing the more money not getting this AVERAGE extra return. Your best possible AVERAGE return would be 5% (10%-5%). However, a lump sum picks up and extra 2% daily market variability on the risk side. If you invested 1/10th every day for two weeks, you would reduce the impact of a 2% daily variability by sqrt(10) to ~0.6%. Your reduction in AVERAGE return would be 1 week at 5% or 0.01%, well worth it in exchange for a 1.4% drop in variability.

No great way to determine the optimum time frame to break up payments but a lump sum is clearly very high risk compared with the optimum return. Dollar cost averaging over a few months makes some sense in this context.

hmm, why does he have to dca over a year?

i see the point about the long term investing smoothing out a lot of bumps, but why not reduce your entry point risk a little bit and say DCA over a month or two assuming no transaction costs..reduces the risk that you do buy on the last good day before a bear market and gets the money invested in a relatively short period of time?

By far, the biggest “dollar cost” is the decline in the value of the dollar itself.

If one delays investing one’s cash, then one is - in effect - investing in currency. Such an act should not be taken lightly.

To Walter’s critics I ask why don’t you take the money that you currently have in your investments and reallocate it all into bond funds or something ultra conservative right now and then on a fixed schedule bring it back to a more sensibly allocated mix? After all your money doesn’t know that it has been accumulated slowly to its current amount. In other words having $100K in a 40/60 split tomorrow is the same thing for someone who just put it in all at once and for someone who built it up over 10 years or more. Taking this reasoning to its logical conclusion, I’ll expand my orriginal question. Why not take all of your investment money today and re allocate it to all bonds today so you can dollar cost average it over a lengthy period of time back to a 60/40 split (or whatever)? And why not do it again and again for the rest of your life? You could gain all of those advantages you speak of again and again.

The question deals with two separate money pools — 1) money already earned and being held in a savings account; and 2) money expected to be earned incrementally in the future.

Two points:

WU is explicitly arguing for LS investing of the future money by specifying the money be invested immediately. THIS IS NOT DOLLAR-COST-AVERAGING. This is LS investing of incremental future earnings.

WU’s conclusions can be supported by the article referenced in paragraph 3. There is no benefit of DCA in a randomly-volatile market. And this is all he says. In paragraph 3 of “missing the target” he does indicate DCA would be better in a declining market, but LS would be better in an increasing market.

But since none of us can predict the future, and on average stocks and bondss perform better than a money market account, LS investing is better.

Please, commenters, read the article in its entirety before you start flaming the message board.

As everyone else says, this “expert” is completely wrong. Dollar cost averaging the S&P 500 (or a fund that mimics it) with a time horizon of say, 10 years or more, is guaranteed to work. Not so with investing a lump sum.

The issue here to me is that the answer doesn’t really address the core of Mr. Hall’s question. The bottom line is that DCA works in all cases except when the portfolio you buy moves up and never looks back from the day you invest your lump sum. If the holdings in your portfolio (whatever asset class they may be) are flat, down, or volatile you will own more shares in the end with DCA. A simple look at the one year graph for any single stock or index makes it clear that historically…and especially now, DCAing a large sum of money over a one year period works.

Your entire thesis is incorrect. Dollar cost averaging is NOT a strategy used to invest “lump sums” as you suggest. It is for the investment of recurring cash flow.

WRONG. Investing a recurring cash flow is simply investing a recurring cash flow. There’s no need to give it a special name.

This article is so wrong in so many ways. Let’s start with the quote in the last paragraph..”the rub is that we dont know what the financial markets will do”. Exactly why we shouldn’t dump a lump sum in at once. DCA is a great investment alternative for those of us who a. dont have the lump sum to invest. B. have a long time horizon therefore buying more when the market is in a trough as it periodically always is. I personally invest every two weeks in my Roth and in periods of market decline will ramp up my contributions as the market drops. Because of this I actually welcome market declines. I have done the math and if I had invested a lump sum each year instead of DCA I would have fared worse at this point.

The writer just wants to stir up some conversation.
The 60/40 plunge does not guard against a downturn in the near term after the decision to invest is made. Dollar cost-averaging will make use of your initial 60k better by withholding the money (automatically) when the market is tanking. Sure it will also withhold when the market is on the up, but *that* is the point of dollar cost averaging - NOT trying to time the market.

One of the worse articles I read here.

With a lump sum, it doesn’t have to be all or nothing. Rather than investing it all at once (and risking putting it all in at the peak) or “dollar cost averaging” it over the course of a year (and thus more likely to come out behind, by missing half a year’s gains)– why not invest it in three chunks over the course of three months? It won’t ALL go in at the peak, but there’s less of an opportunity cost than spreading it out over a year.

I suppose that technically the point of the article is correct, namely that holding cash is too conservative (especially when theory says that at any given moment the market is priced correctly, or at least better than you can price it).

But I think the real value of dollar-cost averaging is in removing the human emotional element, namely the belief that the market will keep doing what it has been doing. If one has a lump sum today, he needs to ask himself why it is availible today and not some other time. If you are investing your entire lotto winnings on the day you recieve it, lump sum is probably fine, but otherwise be careful.

This article and all comments I’ve read on it to this point are forgetting one thing, strategies such as dollar cost averaging, portfolio balancing and diversification are all based on investors being ignorant of the direction of the market or any individual stock. Thus, to remedy this, don’t invest in anything you’re uncertain about the future of (even the broader market), don’t buy shares of companies or markets that you don’t know intimately well how they operate, ultimately make money and what their future prospects are. A better strategy than dollar cost averaging or diversification is to pick investments that you understand and know well (preferably individual stocks, as you cannot easily predict movements of entire markets), be selective, do your homework, know a smart entry point and buy all you can at that entry point. Don’t just protect yourself against ignorance, remedy it with fundamental investing knowledge.

I thought the point of dollar-cost averaging was to allow people to begin investing without say, $60K.

I think this may be one of the worst written articles by a so-called financial expert. Dollar cost averaging into equities is a sensible way to hedge against the uncertainties of equity markets. To ignore the current market trend and condition is simply foolish. Also, I don’t see any rationale for dca into bond funds. After all, assuming stocks decline, bonds will typically increase in value and bond investments have no where near the volatility of equities. Therefore, assuming the current market trend and assuming your investing 100k across a 60/40 split between stocks and bonds, the sound strategy is to invest all 40% in bonds now, and dca into equity etf’s using limit orders at set price declines.

There is also a potential savings with break points if you make a large one time purchase vs spreading out the money with smaller purchases.

But by using a statement of client intent, you can tell the company that you will be investing more money in a specified time frame and thus receive the break points.

I agree with the advice in the column that investing all of a lump sum should provide better expected returns than investing it over time.

I think one point which needs to be made (which I don’t think is made in the original column or comments to the column) is that the market has an upward expectd bias - of about 10% per year for stocks and about 6% per year for bonds - so on average one would expect to earn more of that return the sooner one invests all of it.

Obviously there are years which are much worse and years which are much better - but there is an expected positive return - which is why one chooses to invest in the first place.

I think Walter is dead on but only for investers that follow and understand what is happening in global markets. You can take this one step further as follows: When you feel that you have made a nice return and the markets are getting frothy sell everything and money market your funds. Sit on them until something like were see now in the markets takes hold. Continue to watch the price action on your former equity funds so you’ll know what discount you would be buying them back at if you repurchased them. Once the discount is tempting and market pessimism is high, buy’em all again and sit on them til its time to sell (as above). It’s important to remember that no one cares about your money more than you do and most mutual fund managers are great at buying stocks buy seldom at selling them which means you ride the roller coaster up to the top and unfortunately right back down to where you started, or worse.

I think that if you are long term investor who assumes that it’s not possible to predict what market will do short term then dollar cost averaging is not a good idea. You don’t know if the market will go up or down shortly after you invest, but based on long term growth assumption you know that it’s little bit more likely that stock market will go up. So, the sooner you invest the better.

Even if you invested all 60k in diversified mix of stocks and bonds in March of 2000 you’d still be ok now. Remember that year 2000 was horrible for overpriced technology and if you had most of the money there you were not diversified. Dow Jones Industrial is actually up 20% or so since then.

Your entire thesis is incorrect. Dollar cost averaging is NOT a strategy used to invest “lump sums” as you suggest. It is for the investment of recurring cash flow.

There are so many more variables in this equation.
Dollar cost averaging and rebalancing( every quarter or semi-annually) makes a lot of sense.
In the beginning , you have to decide waht amount you will need or use for this strategy, and how much will be a a money market fund for emergencies.

Whu not take all the money market $ and put it into the market in 6 months( 1 month intervals)?

This is a solid principle that works for the long term. Everyone will always have a different opinion on this way of investing.

I’ve always considered Dollar Cost Averaging to consider future investments (aka money the investor doesn’t have now). Of course if you have 60k, you should invest in a diversified manner that may include cash - per your personal risk profile.
Dollar cost averaging is intended for the monthly, yearly savings that are allocated for investment.

Walter, I am a CFP(R) and usually love your columns. This one isn’t your best. I hope readers get to the second to last paragraph where the inportant point is made. Dollar cost averaging is really only about emotion. For the inexperienced, that 60% is stocks on day one could ruin their appetite for investing for a long, long time…maybe even until the end of the next bull market run where they may inevitably make the same mistake again. I personally got a lump sum pension payout back in Nov…I am investing a bit every 2 weeks in Vanguard index funds…and am glad to be doing so.

I disagree with you. Even with dollar cost averaging you can rebalance the portfolio. Secondly the money can be put in money market account which would earn money, so there is some return of the non-invested money.

Most important I don’t see any financial reason why dollar cost averaging is not a good strategy.

The original concept of dollar cost averaging would likely apply to FIA’s. Fixed index annuities (FIA’s) offer guaranteed safety-net of minimum return on the principal…within a prudent, no-load, safe, guaranteed and automatically tax & legally sheltered environment. Fixed life family- which includes fixed annuities- HISTORICALLY have been virtually immune to credit & market losses.

I see one major flaw in the given scenario, I may be wrong of course. Say we came to a lump sum of money for one reason or another and we follow the advice of Mr. Updegrave and invest that 100,000$ (for the sake of the example) in all at once now. We are currently in February of 2008 and now we have 60,000$ in stock funds and 40,000$ in bond funds (the 60% - 40% allocation). Considering current market conditions, volatility and uncertainty we may either go up from here in which case we luck out and our mix does well. In case of a recession or a prolonged period of decline (6 months or more), our money will be dwindling away, but we will have no money on the sideline to add, or buy the funds on the cheap as we are given that opportunity. Essentially if we lump the money and invest it all at once we are betting arrogantly that the market has hit its lowest now. My suggestion when it comes to lump sums of money: invest it in a ladder fashion i.e. say you have 100K, you give your self room for 3 additional declines in the market. You put in 20K now and say to yourself every other 5% down I will put more down than the previous time. The next 5% down the investment is 30K, another 5% down its 50K. This way we protect ourselves and take advantage of unstable markets, while still putting in large sums of money in rather quickly. If you put in that first 20K and the market goes up quickly, you still made money and can wait for the next correction to put in more. This may not be the best strategy but it gives room for possibility that the market may rapidly correct in the future and you always want a cash position on the side to take advantage of such opportunity. On the other hand if you put in all that 100K at once the 60% of that, that is in funds=60K, after a 15% suggested slow correction used in the previous scenario you are out almost 10K (not counting what is happening with your bond funds), but even worse you have no money on the side to take advantage of the “sale” or buy more on the cheap.
In other words, give your self room to be wrong and have a safety net of cash just in case. What if tomorrow the market over-reacts and falls 5% in one days time, do you not want to have some money on the side to take advantage of that?

Your approach seems quite risky to me, since you pay no attention to entry points. If you select a bunch of mutual funds that you buy all at once with expensive entry points and hold on for the long term, your long term results will be worse than using a dollar cost averaging approach. If on the other hand you purchased at an attractive entry point, your long term results will probably beat dollar cost averaging.

The reason is that you’re holding on to so much cash, you’re virtually guaranteeing you won’t be at your 60-40 target mix for most of the year.

Well, Duh! That is the point of dollar cost averaging isn’t it? The point is to reduce risk by not accidentally dumping all your money into the market at one of the peaks of its normal short-term fluctuations.

“you would have actually been investing much more conservatively than you intended when you chose a 60-40 mix. ”

To the contrary, putting all the money into the market at once is taking much more risk than you intended. In addition to the long term risk inherent in investing in stocks, you are adding the volatility created by regular fluctuations in the market. In effect, there is a danger that you will buy high and that will drag down your returns over the entire life of your investments.

Put another way, you may end up losing a good part of your principal over a few months when stocks fall back to their average price for the year. And like any investment gains, those losses will be compounded over the rest of your investment horizon.

If you are 25 and investing for retirement you can probably consider annual contributions to a retirement fund as “cost averaging” since your investment horizon is 40 years out. Some years you will invest at the annual peak, other years at the annual low. And they will average out over the course of your investments.

But if you invested a lump sum at the market peak you would still be a underwater and a long way from actually getting your expected return based on your investment mix. In fact, it is unlikely you will ever achieve that return unless you are lucky enough to sell at one of the market peaks.

The benefit of dollar cost averaging is NOT additional return. The benefit is lower volatility per percent of return. The studies referenced do show that there is no particular additional reward (return) provided by dollar-cost-averaging vs lump sum investing, but that overlooks the benefit that while there was the same return, the level of volatility went down.

DOLLAR COST AVERAGING DOES WORK AND SHOULD BE FOLLOWED!!!

There is also a potential savings with break points if you make a large one time purchase vs spreading out the money with smaller purchases.

I would have to disagree/agree on a 60/40 split. His big advantage of investing immediately is you have your allocation for the rest of the year and are not “underinvested”. My question is, what is the problem of being underinvested in the short run if it enhances your long-term goals? One year should not matter in the long run and if you are not looking at the long tun, stay out of the markets. I believe the smaller, inexperienced investor invests more on emotions that logic. If the markets take a major hit a month after putting everything in, they are going to second guess their decision. I suggest putting 1/3 in and spread out the purchases over the next 6-12 months. If however, the markets take a decline, add more that month.
For many, FEAR is a stronger emotion than greed.

Actually, in my view, to really leverage Cost Averaging, he should have been taking the $5000 he set aside every month for the past year (or whatever or breaks down to) and invested that each month, instead of waiting for it to accumulate in a bank account. The only reason to do that, IMHO, is he’s getting good interest (e.g. internet direct bank account) and/or he’s going to buy investments that charge 1-time commission.

What if you had invested that $60k all at once in a diversified mix of stocks back in, say, March of 2000? Ugh!

Since, as you say, we don’t know what the market will do, that’s all the more reason to time-diversify via dollar-cost averaging.