hollowcave2 wrote:Some investors might feel a bit uneasy about moving a large block of money into stocks at their all time highs. DCA gives you a way of moving into stocks over a period of a few months so that you spread out the risk in the short term. Now, if you can honestly say that since you're a long term investor, you can ride through a correction this year and stay the course, then a lump sum would be fine. But if you think you might change your allocation based on short term events, then DCA gives you a way to stay the course and still get some sleep. DCA is a risk management technique that allows you to get into the market without the investment paralysis that could result when considering the short term risk of a lump sum. The goal of DCA is to invest immediately and consistently while minimizing the emotional anguish that could result with short term market fluctuations. DCA is not about maximizing performance, but managing risk.
So it depends on what type of investor you are. If you can just set it and forget it, then a lump sum would be fine. But if you find yourself checking the markets to see if you "timed your entry" correctly, then DCA would be better. An additional benefit of DCA is that you are guaranteed an average cost of your purchased shares, during the time of DCA, that is less than the average market price during the same period. This results because since you are investing a predetermined sum of money each month, you buy more shares when the price is low and less when the price is high. There are very few guarantees in investing, but DCA offers one of them.
As an example, you can choose a time period of 6 to 12 months, split the money into equal parts, and invest each part monthly.
Whatever you choose, good luck. And remember that it's time in the market, not timing the market, that counts.
If you invest the lump sum now, you will get the market return over the next year. If you DCA over the next year, you will get about half the market return.
DCA is an inferior way to manage risk. The better way is to adjust your AA.
This results because since you are investing a predetermined sum of money each month, you buy more shares when the price is low and less when the price is high. There are very few guarantees in investing, but DCA offers one of them.
This is incorrect and misleading. DCA will come out ahead if the (geometric) mean price over the DCA period is lower than today's price. If you believe that, why invest at all? Just wait for prices to go down, then buy.