Why dollar cost averaging does not work?
Dollar-cost averaging continues to be used by some investors and recommended by advisors, yet a plethora of academic studies indicate that it is not helpful.
While it may make sense to invest a fixed amount of one’s salary every month, it doesn’t make sense to dollar-cost average a lump sum of money.
One of the latest studies on the topic is "Mathematical Illusion: Why Dollar-Cost Averaging Does Not Work," published in the Journal of Financial Planning.
Author John Greenhut confirms once again that the performance of dollar-cost averaging depends on the trend in stock prices: it will beat lump-sum investing in downward markets, but since markets tend to trend upward over time by an average 9% a year, it is better, on average, to deploy all of the lump sum right away.
Greenhut also lists the many previous academic studies that have arrived at a similar conclusion. The evidence seems overwhelming.
Note: In the post of Jan. 31, 2007, I should not have included John Lawrence Reynolds' book The Naked Investor: Why almost everybody but you gets rich on your RRSP in the group of books described as expressing contrarian views on RRSPs. His book warns about ethically-challenged advisors, not RRSPs.
