Can Taxes Save Dollar-Cost Averaging?

Atra, Robert J.; Mann, Thomas L.
June 2011
Journal of Financial Planning;Jun2011, Vol. 24 Issue 6, p52
Academic Journal
Dollar-cost averaging (DCA) is an investment technique commonly suggested by financial planners and investor websites. While much empirical evidence casts doubt on the benefits of DCA, this paper investigates whether tax options that arise because of DCA investing are enough to offset its lack of benefits. Our study suggests that although DCA does have a tax advantage over lump-sum (LS) investing. the advantage does not make the technique superior to LS. Furthermore, we briefly investigate an issue not frequently addressed in the literature, the receipt of dividends, and determine that the inclusion of dividends favors LS as an investment strategy as well. Overall, our results suggest that in many practical scenarios DCA is not as beneficial as practitioners suggest. On the other hand, DCA is not as economically inferior as some academics have claimed.


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