Sunday, June 3, 2007

Dollar Cost Averaging

The idea is simple: spend a fixed dollar amount at regular intervals (e.g., monthly) on a particular investment or portfolio/part of a portfolio, regardless of the share price. Since in general the market goes up, this is widely considered a safe investing strategy over the long term. In fact while Dollar Cost Averaging is a relatively safe investment strategy over the long term, however it also is not the safest investment strategy or the most reliable strategy or the most effective in general.

Each strategy wins at least some of the time, but after a few runs you'll see that DCA is the statistical "dog", losing about two times out of three.

Of course, dollar cost averaging will win if your start date falls right before a dramatic crash (like October 1987) or at the start of an overall 12 month slump (like most of 2000). But unless you can predict these downturns ahead of time, you have no scientific reason to believe that dollar cost averaging will give you an advantage.

So time does matter, start at big jump and continue until you get 30% profit and cut invest in half, sell at 50%, wait for another jump.

  1. All Money Sense

  2. 4 ways to be a millionaire

  3. Google's market share jumped in April

  4. RBS group raises the stakes in ABN Amro bidding

  5. Yahoo CTO is leaving

  6. PSP, XBox, Zen Skins


Latest Posts