The Best Investing Strategy

Here's the next item I wanted to cover from Kiplinger's "The Best List" (November issue.) Today, we're highlighting the best investing strategy:

The Best Investing Strategy: Dollar-Cost Averaging

Instead of investing a lump sum all at once, you divide the pot into equal amounts and invest each sliver periodically -- say once a quarter. The conventional argument for averaging is that it allows you to buy more shares when prices are down. But averaging's main advantage is psychological: It forces you to invest when prices are down, which you might not otherwise do, and prevents you from investing too much when prices are high and euphoria is dictating investment decisions.

I dollar-cost average every single month. My 401k money buys new Fidelity funds every month while my Vanguard accounts get money transferred from checking and into selected funds (mostly index funds.) I've done this for years, and since it's automatic, I don't really think much about it. I just "set it and forget it." ;-)

For more on making the most of your investments, see Best of Free Money Finance: Investment Posts.

Comments

[Duane Gran]

When it comes to mutual funds, like those typical in a 401k plan, I certainly think dollar cost averaging is a good way to go. Lately I've been performing a thought experiment about the right time to buy for after tax stocks. If a person builds up a reserve of funds in some decent yielding vehicle (ING direct, emigrant direct, etc) and chooses to buy when the market is low this would seem to be a winning strategy.

There are two bits of advice at odds with each other:

1) don't try to time the market
2) buy when other people sell, sell when other people buy

The second bit, which goes into having the discipline to smell an opportunity, requires that you violate #1. For discretionary investing (outside of employer-based retirement accounts) have other people thought through this as well? What is the best technique to have cash on hand for times when opportunity knocks?

If you have a lump sum to invest, dollar cost averaging will cost you money more often than not.

http://moneycentral.msn.com/content/P104966.asp

Of course, for some of us, we can only invest as we are paid and, for that, dollar cost averaging is perfect.

[Binary Dollar]

Isn't it better to get your money in ASAP in the interest of time and compounding?

[FMF]

Anonymous -- I DCA every month -- it's part of my financial plan.

BD -- If I had a big lump sum (like I've had a few times with rolling a 401k into an IRA), I usually put the money into a money market account, then DCA over a 3-6 month period to get it all in the market.

FMF - re: lump sum - you might want to read that link and the papers referenced in them. Dollar cost averaging a lump sum is only good if the market is going down. Since it generally goes up, most of the time dollar cost averaging is a bad idea. I think it'd be a particularly bad idea if you already had the money in the market (eg rollover).

Of course, it does give you a warm fuzzy feeling to DCA. That might be worth the loss for many folks.