Dollar Cost Averaging

in LeoFinance2 years ago

let's assume you have $10,000 at your disposal and one invest in stocks broadly speaking you have two choices when it comes to timing one investing the entire amount right away or lump sum investing to dollar cost averaging or in other words investing gradually in batches such as let's say $500 per month dollar cost averaging tends to be a popular choice because people are under the impression that they're playing it safe and decreasing risk by investing 500 bucks monthly for 20 months rather than 10,000 dollars upfront unfortunately however like with many other things that give you peace of mind the sense of comfort you feel when dollar-cost averaging isn't evidence back on the contrary there's more than enough research which shows that lump-sum investing is the wiser choice from papers written a long time ago such as the one published by george m constantine edith in 1979 to more recent evidence such as the 2011 paper of Gerstein Fisher & Associates so do some financial advisors recommend dollar cost averaging because they're incompetent well not necessarily as some may very well be recommending this approach so as to give people the peace of mind needed to actually invest rather than keep their money under the mattress or in the bank think of it as the placebo of personal finance let's put it this way one is dollar cost averaging superior to lump sum investing nope it's actually the suboptimal choice but to is dollar cost averaging your way into a good portfolio better than keeping your money in the bank most definitely it's also worth noting that past performance is not indicative of future results or in other words we can not be certain that lump sum investing will always outperform just because that's how things currently stand still if you're interested in allocating capital based on what has been proven to currently work better lump sum investing is the way to go