Timeline for Proof showing that dollar cost averaging always worse than lump sum alternative
Current License: CC BY-SA 3.0
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| May 29, 2012 at 7:33 | comment | added | amgc | @Freddy The definition in the academic literature, the link cited, and even online dictionaries link excludes any strategy that changes due to additional information (e.g. price changes), and it's pretty much due to this that DCA is suboptimal. I don't think that anyone claims that splitting trades into small pieces can have benefits if it incorporates some of this extra information, but then it is not DCA by the commonly used definition. (I don't follow your definition - is the average fixed at the outset, and costed in cash) | |
| May 29, 2012 at 1:54 | comment | added | Matt Wolf | The definition is clear: DCA simply means to average into trades/investments, nothing else. The function (whether its utility, a trading strategy, or fixed time intervals) does not have an impact on whether an investment is averaged into, price wise, or not. The academicians cited in your referenced paper seem to have a problem to distinguish between those two concepts. They compare two different things and conclude from that that DCA is suboptimal which is factually incorrect. | |
| May 28, 2012 at 13:52 | comment | added | amgc | In the article: "Let’s look at an example of DCA. Lets say you just inherited 20,000 and you decided to invest it in the stock market. Once you have determined a proper asset allocation ... you could invest it all at once or do “dollar cost averaging” into the securities by purchasing a set dollar amount of securities at pre-determined intervals. An example would be investing 1666.67 on the first of each month for 12 months." It seems to me that the DCA described here and in the Constantides paper is exactly periodic investments. Perhaps you should define DCA to clarify your view. | |
| May 28, 2012 at 13:39 | comment | added | Matt Wolf | ...which is completely unrelated to dca. All that dca is about is the fact that not all proceeds are invested at a single point but at several instances. There does not have to be any time-based relationship, dca does not hint at all at what the underlying motivation is of the specific timing of the sub-investments. Its a very trivial yet hugely misunderstood concept. | |
| May 28, 2012 at 13:33 | comment | added | Matt Wolf | this is total nonsense. There are some highly profitable professional hedge fund traders that dollar cost average every single day, they just called it "legging in and out of trades". I would caution to be careful to take trading related academic treatises too seriously. Academicians are excellent at researching things, but trade entries and exits is something you definitely do not learn in text books nor by performing academic research. Also note that the point of Malkil in your reference is again PERIODIC investments, hinting that the timing of the investments is not linked to a strategy | |
| May 28, 2012 at 13:23 | history | answered | amgc | CC BY-SA 3.0 |