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This is from an investing article that appeared a few days ago:

A widely recognized investment strategy known as dollar cost averaging offers a systematic approach to investing. By following this plan, you invest a specific dollar amount at set times, regardless of where the market may be at the time. One of the advantages of this strategy is that it can be applied to a wide variety of investment vehicles.

As you know, the market price of an investment fluctuates. By using dollar cost averaging, you can buy more shares when the price is low, but you buy fewer shares when the price is high. While that seems fairly elementary, the interesting thing is that by spreading out your investment dollars this way, the average cost you pay per share can actually end up being lower than the average price per share over an extended period.

No. Wrong. Incorrect.

I don't mean to pick on this writer in particular. You can find dozens of such articles every month. The problem is that dollar-cost averaging is complete bullshit.

Don't get me wrong: The idea of investing fixed sums each month isn't a bad. That's how many people invest because that's how they're paid.

But there is absolutely no inherent advantage in dollar-cost averaging over lump-sum investing. ZERO. Spreading out your investments over an extended period doesn't decrease your risk one bit. The idea has been thoroughly refuted yet the myth won't die.

The advantage of dollar-cost averaging was blown to smithereens nearly 30 years ago in this article by George Constantinides. Here's another article on the subject by John R. Knight and (my old finance professor) Lewis Mandell.

Lump sum investing is the best. Don't diversify by time, diversify by assets.

Posted by edelfenbein at July 10, 2007 1:42 PM