Dollar cost averaging

From Wikipedia, the free encyclopedia

Dollar cost averaging (DCA) is an investing technique intended to reduce exposure to risk associated with making a single large purchase. According to this technique, shares are purchased in a specific amount on a specified periodic basis (often monthly), regardless of current performance. The theory is that this will lead to greater returns, since smaller numbers of shares will be bought when the cost is high, while larger number of shares will be bought while the cost is low. However, research has shown that investing a lump sum according to DCA principles generally results in worse performance as compared to investing the entire sum at one time (Constantinides).

The investor who has a stream of income (e.g., a dependable periodic paycheck) of which she would like to invest a part in mutual funds is investing in a pattern that seems similar to dollar cost averaging, but in fact the full investment is being made each time with no "spreading".

[edit] References

• Constantinides, George M. (June 1979). "A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy" (PDF). Journal of Financial and Quantitative Analysis 14 (2): 443-50. Retrieved on 2006-06-22.
• Middleton, Timothy (2005-01-04). The costly myth of dollar-cost averaging. MSN Money. Retrieved on 2006-06-22.

• The Intelligent Investor: revised 1972 edition Benjamin Graham, Jason Zweig. Collins, 2003. ISBN 0-06-055566-1