Practical Applications of Another Look at Dollar Cost Averaging

Abstract

<h3>Practical Applications Summary</h3> In <b>Another Look at Dollar Cost Averaging</b>, from the Summer 2018 issue of <i><b>The Journal of Investing</b></i>, <b>Gary Smith</b> and <b>Heidi Margaret Artigue</b> of <b>Pomona College</b> review the merits of dollar cost averaging (DCA). DCA’s proponents assert it sidesteps the risk of investing all one’s money inopportunely, by consistently purchasing equal dollar amounts of stocks at regular intervals, and also encourages savings and investment discipline. DCA’s detractors avow that its very rigor precludes a flexible investing response to changing market conditions (such as portfolio rebalancing), and that, depending on an investor’s goals, other strategies (such as lump-sum investing) may be more suitable. The authors counsel a balanced view of DCA, one that considers the broader contexts of investment horizons, asset volatility, past and anticipated stock returns, and alternative returns on safer investments in lieu of stock market participation. They acknowledge that DCA’s supposed low-cost virtues may be somewhat illusory. Using mean-variance analysis and applying Tobin’s (1958) separation theorem, they find that, when properly applied, DCA is a legitimate tool for diversifying a portfolio—but over time rather than across asset classes—and “particularly appealing when investing in volatile stocks over a substantial horizon. ” DCA, they conclude, is neither the overrated refuge of naïve investors nor an investing panacea. <b>TOPICS:</b>Security analysis and valuation, equity portfolio management