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Dollar Cost Averaging

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Dollar Cost Averaging refers to a procedure whereby an equal amount is invested each period on an ongoing basis.  For the purpose of deploying a stream of cash-flows (e.g., the residue of your take-home pay after subtracting expenses), this basically just means investing what you have to invest when you have it available to invest.  There are few other good choices in such a situation.   However, for those who are making changes in their portfolios, this might mean spreading out the change over a period of time rather than making the change all at once.

Michael S. Rozeff, "Lump-Sum Investing versus Dollar-Cost Averaging: Those who hesitate, lose," Journal of Portfolio Management, Winter 1994, pp. 45-50.  " ... any investor with funds to put to work in risky assets should not, as long as the expected risk premium is positive, hesitate to invest immediately.  To spread one's investment over time simply invites higher standard deviation of return without an increase in expected return."  "...dollar averaging, or spreading a risky investment out over time, is mean-variance inefficient compared with a lump-sum investment policy that simply makes a once-and-for-all lump-sum initial commitment."

Richard E. Williams and Peter W. Bacon, "Lump Sum Beats Dollar Cost Averaging," Journal of Financial Planning, April 1993, pp. 64–67 (1.8mb).  Also in Journal of Financial Planning, June 2004, pp. 92-95.  This article compares lump-sum investment in the stock market vs. doing it gradually over time.  "... the odds strongly favor investing the lump sum immediately [as opposed to spreading it out over equal installments]."

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