Lifetime Dollar-Cost Averaging: Forget Cost Savings, Think Risk Reduction

Dubil, Robert
October 2005
Journal of Financial Planning;Oct2005, Vol. 18 Issue 10, p86
Academic Journal
• The cost benefit of dollar-cost averaging (DCA)--a constant dollar amount buys more at lower prices and buys less at higher prices--is dubious, since one cannot predict the path of prices. • The risk-reduction benefit of DCA is real: averaging over time is akin to buying less-than-perfectly correlated assets. This produces a lower volatility of the terminal value of the investment--that is, a more certain outcome. • Averaging results in a much lower expected shortfall when losses occur. Retirement investors pursuing DCA over a long time will face much less "disappointment" if the price path of their investments leads to a loss. • The longer the averaging period relative to the total investment horizon, the greater the risk reduction. • The volatility reduction can be as high as 40 percent, and the shortfall reduction as high as 30 percent, if averaging spans the entire investment horizon. • Risk reduction, and not cost savings, should be used as a primary argument for recommending DCA-like automatic investment plans to all long-term investors.


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