Dollar Cost Averaging

What is Dollar Cost Averaging (DCA) actually? DCA basically involves investing the same dollar amount of money on a periodic interval.

Does DCA work?

Well, it depends.

1. The premise of dollar cost averaging is built on the fundamental belief that the stock market in general always move upwards in the long run. Therefore, to benefit from DCA, one must be prepared to follow through such an investment method for the long run.

2. Quality of the stocks within the portfolio - for the premise stated in point 1 to be valid, it is important that portfolio of stocks are of good quality and are will perform well in the long term.
3. Initiation of the program - one would gain huge advantage, should one go for dollar cost averaging investing, that the initiation is carried out at the end of a long term cyclical bear run phase and beginning of a bull run. Some people may be of a different view on this and state that the difference is not huge. Just imagine if a person were to start his DCA at the beginning of year 2000 before the internet bubble, it was take a long, long time for the portfolio to recover from the potential losses if the focus was on internet/technology stocks.

Under which situation/scenario does DCA works best?
A portfolio of great quality stocks that keep increasing in value over long run.

Under which situation/scenario does DCA works worst?
1. Prolong bear market.
2. Invest in poor performing funds / low quality stocks that are trending downwards.

What's the one advantage of DCA from an individual's perspective?
DCA is in a way akin to force saving - and may therefore be useful/beneficial for some individuals as it help them to set aside money to build their assets.

What do most mutual funds want you to believe and why?
DCA is good because it is in line with their interest of constantly and consistently expanding their fund size regardless of whether the market moves up or down.

So, what should you do?

Well, it is difficult to give straight forward advise here as every individual's belief, situation and background are different.

However, this is what a person might choose to do to profit from a dollar cost averaging strategy:

• If he does not time to monitor the market, and are basically too tied-up with his day job and family commitments, for example. Then, using DCA and invest with a reputable fund with solid track record could be a good way to go.
  
  
• Timing the market somewhat but using only long term cycles indicators, for example the 50, 100 and 200 days moving averages or other long term economic indicators. That includes knowing when to withdraw the fund basing of these long term indicators.
  
  
• Apply the DCA strategy if one has the time to do the investment by himself but only invest in high quality and up trending stocks.

To borrow a quote and share here:

"My comment on the ideas that stocks always go up long term and that compound interest can make you rich is that these are mottos for good times. When people are in extremely tense historical times, they understand that neither of these apparent truisms can be taken for granted. You always hear these ideas in the middle and later stages of bull markets. ... such truisms change with time"

Robert Prechter

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