More DCA references:
" Lump Sum? Jump In Now.
By Frank C. Armstrong, CFP
Last in a series
Congratulations! You won the lottery, inherited some money from a distant relative, sold your company or rolled your pension into your IRA. You have designed an asset allocation plan that meets your needs and have selected the funds you want to invest in.
But just how should you invest that large sum? Should you invest it all in one fell swoop? Or should dollar cost averaging be part of your strategy - investing your money in small bits and pieces over time?
In this case, don’t use dollar cost averaging. While it works well in many circumstances, as we’ve pointed out during the past couple weeks, it actually works against you when you have a large lump sum to invest. Here’s why.
The market’s upward bias is so strong that it’s unlikely that market prices will be more favorable at some future point than they are today. No matter how you measure it, the market has more good periods than bad ones, and the good periods are better than the bad periods are bad."
This article goes on to show a table of S&P500 performance since 1926 and discusses the implications of using DCA.
"Based on past history, and depending on the period we selected, we would have been right between 62% and 90% of the time had we invested the entire sum immediately rather than waiting until the end of the period to invest part or all of it.
Stalling for time
It may feel good (or more prudent) to delay making the commitment with all or part of your lump sum in hopes that tomorrow’s prices will be more attractive than today’s. Especially in unsettled times, the temptation to "wait and see what happens" or other excuses to delay making a commitment to the market can be overwhelming.
But these delaying tactics are nothing more than thinly disguised attempts to time the market. And delaying investing like that actually decreases your chances of success. Dollar cost averaging with a lump sum is an attempt to "split the baby," and that has historically been a losing strategy. . ."
The article below is less tactful in it's criticism of DCA when lump sums are available.
". . .If you have money to invest as a lump sum, DCA produces a LOWER return than investing the money all at once. Two researchers (Williams and Bacon) have discounted dollar cost averaging by statistically showing that putting all the funds in at one time outproduces dollar cost averaging by two to one. They invested a theoretical sum in 90 day T-bills and moved into the S&P 500 over a year's period. They compared these results with investing all the funds at once- starting with different periods from 1926 to 1991. . ."
"Dollar Cost Averaging :
Making a Little Go a Long Way
. . . As previously noted, dollar cost averaging is probably best suited to the investor who is starting to build a portfolio and does not have sufficient funds to purchase a meaningful number of shares in several companies. . .
As with any other aspect of investing, there are no guarantees that this will produce cost benefits. Some studies that have been done on simple investment plans have not provided conclusive evidence and there are too many variables to simplify any in-depth analysis. However, there is evidence that for the investor that has the capital to make a significant one time investment in a company, there may be no benefit to dollar cost average the investment. However, for the small investor, the discipline demanded by dollar cost averaging may be the greatest benefit. And as in other aspects of life, discipline is essential for good behavior!"
What DCA is really good for is reducing stress of needing to make a decision every paycheck and forcing a discipline to your investing. This article states that very well.
Investors who do not wish to be stressed by market volatility adopt the dollar-cost averaging method for secured long term investment planning. . .
By adopting this method, one will be less tempted to make decisions based on short-term phenomena. . .
Instead of trying to time the market in response to greed or fear, the two most common emotional influences; you invest in an installment plan knowing that your money will grow over the long term."