Post by oldman on Oct 19, 2013 8:17:22 GMT 7
Dollar cost averaging (DCA) is a valid investment strategy of investing a fixed amount of money on a regular basis in a financial instrument like stocks and shares. It is also a good form of financial discipline in setting aside a fixed amount of money every month for investing.
However, one should note that DCA does not overcome the issue of market timing and with it, market risks. Stock markets go up and down all the time. If one starts using DCA when the market has crashed, you are likely to benefit when the market recovers. However, if one starts using DCA when the market is at its height, it is not going to save you from the market collapse. You still need to time your entry regardless of whether you use DCA as an investment strategy because DCA will not help you time your market entry or exit.
Without timing your market entries and exits, you will not maximise your returns from the market. DCA appears to work in a bull market because stocks are going up in price anyway. Put another way, DCA will work in a bull market.... so will any other investment strategy. It works because the price you started buying is lower than the current price as the market is on the climb. If you start buying using DCA in a fallling market, your investments will fall in value simply because the market has fallen. DCA has nothing to do with market timing... it does not predict market timing but neither does it negate market timing.
Hence, it is wrong to state that if one invests using DCA, he does not have to bother about market timing. Yes, I know of many financial advisers who try to sell DCA type investing this way... it sounds very appealing as it appears that this strategy can overcome the issue of market timing. The truth is that this strategy has nothing to do with market timing. It cannot overcome the issue of market timing nor the reality that without timing the market, one cannot maximise one's return in the stock market.
DCA is at best, an investment strategy to put a fixed amount of money into the stock market at regular intervals. No more, no less. It does not overcome market timing nor reduce your risk exposure in the markets.
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For very long-term investors, does bull market matters?
However, one should note that DCA does not overcome the issue of market timing and with it, market risks. Stock markets go up and down all the time. If one starts using DCA when the market has crashed, you are likely to benefit when the market recovers. However, if one starts using DCA when the market is at its height, it is not going to save you from the market collapse. You still need to time your entry regardless of whether you use DCA as an investment strategy because DCA will not help you time your market entry or exit.
Without timing your market entries and exits, you will not maximise your returns from the market. DCA appears to work in a bull market because stocks are going up in price anyway. Put another way, DCA will work in a bull market.... so will any other investment strategy. It works because the price you started buying is lower than the current price as the market is on the climb. If you start buying using DCA in a fallling market, your investments will fall in value simply because the market has fallen. DCA has nothing to do with market timing... it does not predict market timing but neither does it negate market timing.
Hence, it is wrong to state that if one invests using DCA, he does not have to bother about market timing. Yes, I know of many financial advisers who try to sell DCA type investing this way... it sounds very appealing as it appears that this strategy can overcome the issue of market timing. The truth is that this strategy has nothing to do with market timing. It cannot overcome the issue of market timing nor the reality that without timing the market, one cannot maximise one's return in the stock market.
DCA is at best, an investment strategy to put a fixed amount of money into the stock market at regular intervals. No more, no less. It does not overcome market timing nor reduce your risk exposure in the markets.
----------
For very long-term investors, does bull market matters?