Talk:Dollar cost averaging

Too scant and unbalanced

There is not much in this article, but a definition, also the article is clearly biased against DCA, not enough balance.

Agreed. The article is clearly biased. A lot can be said for or against DCA, and even if you are of the opinion that it is a poor technique, it would be better to attempt to explain why than to simply state a criticism. People who know nothing about it may assume it is an unwise without understanding any detail. --Johnsm2 23:13, 15 December 2006 (UTC)

Well, now it seems it has gone too far the other way, and is too vague. It says it's "generally considered safe" (whatever that means) but one of the main links is to a seminal article which argues that it is suboptimal. NZ forever 23:56, 27 March 2007 (UTC)

Accuracy problem: Dollar cost averaging by way of automatic invest programs does not usually incur transaction costs. Not discussed at all are the benefits of regular investment of relatively small amounts in vehicles that are less accessible than a savings account. No persuasive evidence either way is provided. I suggest simply describing the practice and eliminating the opinion pro and con until there's credible evidence. EdwardB 3 (talk) 18:16, 24 February 2009 (UTC)

I have attempted to resolve these issues by separating the concept of DCA from automatic investing in a new "Confusion" section. The statistical arguments against DCA have nothing to do with automatic investing - they have to do with opting for DCA when you have a lump sum available for investment today. As a result this article could be very confusing and detrimental to unsophisticated investors. Even Orman and Ramsey are talking past each other here.... the referenced link to Orman is talking about automatic investing, whereas the Ramsey link is clearly addressing DCA as a lump-sum alternative. Furball4 (talk) 19:20, 3 May 2009 (UTC)

The weakness of this article which I can see is primarily poor organisation of the content. The description of the technique at the head of the article strays prematurely into a contentious argument in its favour in the last sentence, instead of staying neutral and sticking to making a clear statement of the meaning of the terminology. The supporting citation at that point is also rather unhelpful, and does not seem to lead anywhere on the internet. This undermines the quality of the article. It would be an improvement to move all argument for and against to a separate section devoted to discussion lower down the article.

Jonathan G. G. Lewis 03:26, 14 January 2014 (UTC) — Preceding unsigned comment added by Jonazo (talk • contribs)

I love this article

It shows the weakness of Wikipedia exquisitely. If you didn't know that democracy and truth are incompatible, then read this article to find that out. Setting aside the granularity of the transaction to minimize transaction costs, dollar cost averaging has long ago been incontrovertibly and mathematically proven to be the best strategy in the absence of asymmetric (insider) information. The controversy? Giving that financial advice is a massive industry, and trading on insider information is illegal, it is inevitable that people in positions of influence (i.e. talking heads) are going to say the moon is made of cheese and you should listen to their advice and don't use dollar cost averaging. 24.22.167.81 (talk) 01:25, 5 February 2012 (UTC)

You do not need to agree or disagree with there being any advantages in dolloar cost averaging to see that the article fails to please anyone. The reason I believe is its failure to remain neutral. (See my comment in the previous discussion section above.)

Jonathan G. G. Lewis 03:29, 14 January 2014 (UTC)

Can you improve this paragraph?

The investor who has a stream of income (e.g., a dependable periodic paycheck) of which she would like to invest a part in mutual funds is investing in a pattern that seems similar to dollar cost averaging, but in fact the full investment is being made each time with no "spreading".

I think I know what it means, and actually agree with it, but it seems that there must be a clearer way to say it. ike9898 03:06, 18 January 2007 (UTC)

New edits

I made some substantial edits to try to better elucidate the point of the tradeoff between expected performance and variance of performance when implementing DCA. That's the main point here. When expectations are for positive returns, DCA will cost you some return but will reduce the variance of your outcomes. I also added some relevent work on DCA horizon and some advanced techniques. Peters33 16:44, 6 June 2007 (UTC)

Renaming

As noted in the terminology question below, this article describes a strategy that is independent of the currency in which it is conducted, and having a Neutral Point of View would seem to imply that the title should reflect this.

So, would it be appropriate to rename this article to "unit cost averaging"?

Martin Kealey (talk) 01:06, 7 January 2016 (UTC)

Terminology

Is there a currency neutral term for dollar/pound cost averaging? What does the rest of the world call it? 147.252.92.148 (talk) 14:57, 16 May 2008 (UTC)

According to the article in the German Wikipedia, the currency-neutral term is "Cost Average Effect". --Kalbasa (talk) 15:39, 12 January 2009 (UTC)

Hello, I am new to this so please bare with me. First, the first statement is totally wrong. "Dollar cost averaging — also known as a constant dollar plan" this statement is totally wrong. Dollar cost averaging is a type of periodic investment plan. You plan how often to invest, how much to invest and how long to invest.

When institutions first started to invest in the stock market, one of the first types of plans they came up with was the constant ratio plan, often called rebalancing. Another type of plan is called a variable ratio plan, there are all types of ways of doing these plans. The simplest is called the "Constant Dollar Plan", this plan has been discussed in a lot of investing books. How it works is very simple. Say you have $ 10,000 dollars to invest, you invest half into stocks, and the other half into bonds or a money market fund. Say your shares cost $10.00, you invested $5,000.00, so you have 500 shares. Later after a market move you find your shares are valued at $3.00 a share, you have lost 70% of your portfolio. You now transfer money into the stock, to bring the value back to $5,000.00, you add $3,500 dollars. You now have 1,666 shares. A while later you see that the market has recovered and you shares are now valued at $10.00 a share. Your shares are now worth 16,660 you now sell until you only have $5,000 in the market. You now have $5,000 in the stock market and $13,160 in bonds. That is the Constant Dollar Plan in a nutshell.Lostcowboy (talk) 03:32, 13 October 2008 (UTC)

Reincorporate

I've removed the following paragraph from the intro

Since the market has a positive mean rate of return, dollar cost averaging usually requires the investor to give up some expected return for the benefit of reduced variance in his eventual outcome. In fact, research has shown that investing a lump sum according to these principles generally results in worse performance as compared to investing the entire sum at separate times (Constantinides, 1979). However, the investor can expect a reduction in the variance of his performance by implementing dollar cost averaging. While dollar cost averaging can help to limit the downside of a worst-case scenario of an immediate drop in asset value after the lump sum is invested, most market research has shown that such drop-offs are relatively rare compared to the strong emphasis the strategy puts on avoiding them.

• Constantinides, George M. (1979). "A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy" (PDF). Journal of Financial and Quantitative Analysis. 14 (2): 443–50. doi:10.2307/2330513. Retrieved 2006-06-22. {{cite journal}}: Unknown parameter |month= ignored (help) Archived from original on 2003-03-19.

It sounds like it has some meaningful information. But I think it's too detailed to be in the intro. It could be rewritten and reincorporated into the body of the article. --Kalbasa (talk) 15:45, 5 January 2009 (UTC)

Here are a couple of more paragraphs that I cut. It's possible that there could be useful information in there. But these must be rewritten.

Another variation is called value averaging. In contrast to dollar cost averaging, this technique aims to invest an amount in each period such that a target investment value is achieved in each period. In some cases, value averaging will call on the investor to sell some of his asset if the target is surpassed. It is more complicated than basic dollar cost averaging but has been shown to produce superior results.

Until now there has been nothing similar on the withdrawal side. In fact the common practice of withdrawing a constant sum each period is dollar cost averaging with you on the losing end. United States patent 7003483 has been issued for a method of reverse dollar cost averaging to sell for more, not less, than the average price.

--Kalbasa (talk) 16:26, 5 January 2009 (UTC)

Penny Stock Averaging Table

Investment amount for a current bear market purchase: $500.00 USD

Select number of shares to buy below based on current price...

$0.01 per share: 50,000 shares

$0.10 per share: 5,000 shares Note: There are 10 of these in 50,000...

$0.25 per share: 2,000 shares Note: There are 25 of these in 50,000...

$0.50 per share: 1,000 shares Note: There are 50 of these in 50,000...

$1.00 per share: 500 shares Note: There are 100 of these in 50,000...

$1.25 per share: 400 shares Note: Opps... Only 100 shares less than for $1.00!

$1.50 per share: 333 shares Note: Opps... Only 167 shares less than for $1.00!

Need we say that we should sell (instead of buying) at more than $1.50?

Caution: If a penny stock company closes permenently from business the share price will be nothing at all. What other risk is there? Time loss? Company debt should be 50% or less to survive the economic downturn. Also, a resonable sales of survival type products. Reduce your cost average over multiple buys. Than hold for the bull market. Then sell after significant economic recovery.

UnderTwoBucks (talk) 00:09, 30 January 2009 (UTC)

Transaction fees

I don't know if it's the case in all DCA plans, but the ones that I've seen do not have transaction fees, you buy them through a bank or fund and pay a percentage of your average investment through the year. I'm not sure it should be given as an argument against DCA. TastyCakes (talk) 15:13, 19 August 2009 (UTC)

If you work out a DCA plan with an investment firm and are contributing to a fund of sorts, they would likely waive transaction fees. However if one were to do this on their own with pure stocks, (IE using Scottrade or the like) you would take huge margins with trades. @$7 per trade, doing a $100 monthly purchase, you're already taking a 7% loss of the return. However, it seems unlikely that someone who is going to utilize DCA is also not the person who is going to frankly purchase stocks, either. So it's entirely feasible that you could rack up huge trading fees, but not entirely likely.Tmoore121 (talk) 15:50, 17 June 2010 (UTC) —Preceding unsigned comment added by 71.229.153.135 (talk) 15:45, 17 June 2010 (UTC)

This seems a spurious argument, as any transaction fees would be a constant thoughout the investment lifetime. For example, if a persoon were dollar-cost averaging into a Mutual Fund A-share, all fees are a constant percentage of the amount invested and paid up front. Therefore, when factoring in the amount of gain the fees are already taken into account. Rapier (talk) 17:33, 15 January 2011 (UTC)

I think there is confusion here, rarely are their fixed transaction fees for mutual funds and ETFs. I think the transaction fee argument only works for pure stock purchases, which I doubt many people dollar cost average on. Anyways, the statement is original research without WP:V references, so it should be deleted unless more references are added. --MATThematical (talk) 06:42, 16 June 2011 (UTC)

Confusion

In August Substar added a "citation needed" tag to the claim "the market trends upwards over time". This does not seem to me to need citation, so I would like input on whether it does and, if so, what kind of citation might be called for. A good overview of several academic studies on the topic of long-term returns can be found here and Shiller's venerable data set here. Both establish long-term upward trends, which is all that I was trying to claim. Perhaps my claim should simply be revised to include a time horizon. For example, "the market trends upwards over long periods of time". This altered claim still functions as grounds for the following statement that tomorrow's prices are, on average, higher than today's. Disagreement would be equivalent to the claim that the market has no internal rate of return, a position that I don't feel needs to be cited against. Input? If I don't hear anything after a while, I'll add "long periods" and remove the "citation needed" tag. Furball4 (talk) 05:46, 15 January 2011 (UTC)

It seems you have discovered a citation for the claim. Why not put it in and remove the tag? Rapier (talk) 17:25, 15 January 2011 (UTC)

I added the citation, and also used more hypothetical language to retain the explanatory value while avoiding the claimed bias (several new 'citation needed' flags were added by 75.147.140.141). I still disagree with the need and think it only adds clutter. If investors do not expect the market to increase over time, they do not put their money into it. Alternative expectations are therefore irrelevant in discussions of how to schedule such purchases. If we are allowed to assume nothing at all, this article will end up being very long indeed. I also altered the language of investing 'tomorrow' to investing 'at a future time', because I meant 'tomorrow' in its purely generic, metaphorical sense. The market can technically rise while having more down days than up days (which would result in tomorrow's prices being lower than today's, on average), as long as the up days are larger in aggregate. But again, this has no meaningful impact on a discussion of DCA and its confusion with automatic investing. Furball4 (talk) 04:54, 14 March 2011 (UTC)

Mathematical treatment of this topic?

Does anyone have a reference to any paper or write up for a complete mathematical treatment on this topic? I found it difficult to form my opinion without resorting to some math. — Preceding unsigned comment added by Zsljulius (talk • contribs) 17:39, 18 October 2013 (UTC)

Dubious content

’’As the amount of shares that can be bought for a fixed amount of money varies inversely with their price, DCA leads to more shares being purchased when their price is low and fewer when they are expensive. As a result, DCA lowers the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time.[1]‘’

DCA lowers the cost per share of the investment compared with...what? The statement is too vague to judge or test its validity. I suggest it should be moved lower down the article, and made into something clearer and more meaningful. (I suspect though that if it is turned into a precise statement, it might easily be proved a fallacy with a bit of maths.)

’’One key component to maximizing profits is to include the strategy of buying during a downtrending market, using a scaled formula to buy more as the price falls. Then, as the trend shifts to a higher priced market, use a scaled plan to sell. Using this strategy, one can profit from the relationship between the value of a currency and a commodity or stock.’’

This contribution seems to be decribing a contrarian investment strategy which is distinctly different from dollar cost averaging. What is it doing here?

Jonathan G. G. Lewis 03:59, 14 January 2014 (UTC) — Preceding unsigned comment added by Jonazo (talk • contribs)

This sounds like the Martingale system???

This sounds like a Martingale strategy. It's not sustainable, It's gambling. 129.180.158.114 (talk) 11:49, 22 July 2014 (UTC)

Wrong, its not gambling, its long-term investing. It is not focused on price but on returns: e.g.: dividens, interests. --95.222.188.3 (talk) 07:10, 4 July 2015 (UTC)

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Sub-optimal?

Sub-optimal compared with what? DCA is a solid satisficing investment strategy; the perfect is the enemy of good enough. This article needs a thorough clean-up, so once I get a round tuit... kencf0618 (talk) 17:23, 22 February 2022 (UTC)

Basically an opinion piece

The section 'Discussion of the risks and benefits of dollar cost averaging' reads like an opinion piece rather than an objective summary of literature. Definitely should not be on Wikipedia in it's current form. I don't have the knowledge to rewrite it, so I hope someone else can clean this section up. — Preceding unsigned comment added by Theritm (talk • contribs) 07:30, 4 May 2022 (UTC)