Dollar Cost Averaging

Abstract

Dollar Cost Averaging is a strategy for purchasing equity securities that is widely recommended by professional investment advisors and commentators, but which has been virtually ignored by academic theorists and textbook writers. In this paper we explore whether the strategy is but another instance of irrational behavior by individual investors, or whether it is an investment heuristic that has survival value in an environment in which security prices exhibit mean reversion behavior that has only belatedly been recognized by academic theorists. Our evidence supports the view that the uninformed individual investors who follow this strategy in purchasing individual stocks to add to an existing portfolio are better off than if they followed the rational strategies traditionally recommended by academics. Copyright Springer 2005

John Doe's Old-Age Provision: Dollar Cost Averaging and Time Diversification

“…Constantinides [1979] demonstrates theoretically that sequential investment strategies not strictly adhering to past decisions, like dollar cost averaging, but rather using upcoming information to optimize the portfolio, will lead to higher utility. Brennan et al [2005] corroborate the superiority of flexible investment strategies. Comparing the empirical certainty equivalents of LS-DCA and lump-sum investment strategies from one to six years, they find that value-weighted portfolios outperform equal-weighted market portfolios.…”

Facilitating Informed Decision-Making in Financial Service Encounters

“…4), the client can explore the basic properties of different strategies. The need for a savings strategy is closely related to the question of the cost-averaging effect (Brennan et al 2005), which is often used to promote certain investment strategies (Williams and Bacon 1993). Here, Fig.…”

“…The bank's brochures point out that this strategy is always superior to a strategy of regularly buying fixed amounts of shares (thus paying a variable price). However, instead of just believing the information that is given, the client can simply explore this by himself, even without understanding the model's inner mathematical functions (here, the difference between harmonic and arithmetic means) (Brennan et al 2005). However, under certain circumstances (Fig.…”

Simulation Analysis of a Compound Investment Strategy for Mutual Funds: A Case Study on an Investment Trust Company

“…Hence, some researchers proposed DCA method to conquer the preceding problem [4]- [6]. DCA approach is a process of making a regular deposit in specified mutual funds at a regular time interval.…”

“…DCA approach is a process of making a regular deposit in specified mutual funds at a regular time interval. The merits of this method are as follows: 1) the method can diversify investment risk by timing diversification during the period of the investment life cycle; 2) the flexible investment plan with relatively small amounts of each investment can reduce investors' financial pressure and develop disciplined long-term investment plans [3], [5], [6]. As Taiwan's economy was in the period of 1982 to 2012, on average, every 13 months would occur a financial fluctuation which let TAIEX index (Taiwan stock exchange capitalization weighted stock index) generate a loss of 29.58%.…”