Like I said before, I didn't think there was much point in arguing about definitions but I think some of the disagreement regarding the validity of DCA in this thread is now due to differing definititions of DCA. In this regard yourself and charttrader are also somewhat guilty in "misrepresenting DCA" when you restrict your definition to applying DCA through-out the investment period and to situations where the investor is starting with a lump sum. DCA is generally accepted to cover far more investment strategies than this, so to dismiss DCA completely on the basis of a narrower definition is not entirely fair.room305 said:I am extremely dubious about the validity of this article. Apart from his use of language ("I feel that/It is my feeling that ...") he, similar to Rory, misrepresents the difference between DCA and investing via a lumpsum:
Regarding the validity of the article, I can't see why you'd be dubious besides the fact that he only agrees 90% with you. You might be swayed by the fact that it's not supposed to be an academic paper so the language is not academic. Howerver, he clearly explains this methodology and the data he's used and quantifies everything. He starts the article claiming he is a strong believer in DCA but ends it, having done the analysis with historical data coming to the conclusion that DCA is only beneficial under certain particular circumstances and that under many circumstances (such as under the conditions you give in your example), it is poor value. So basically the article largely supports your claim?
It's not as unusual as you'd think. Off the top of my head, I can think of people receiving an inheritance, a lump sum from property disposal, redundancy payment or a lump sum as part of their pension. These are also the kind of situations where people are likely to consider investing in shares.The scenario he uses to justify why he is a "strong believer" (as he refers to it) that DCA is a better strategy is so specific as to be pointless. How many people have more than 50% of their entire net worth in cash to invest in the stock market in one lumpsum? He makes no mention of costs either.
I've no doubt that brokers encourage people to invest in ways which may not be to the client's benefit. However that's a reason to be sceptical not to completely dismiss DCA. Brokers also encourage people to invest in stocks in the first place (for the brokers' self interest - earning commissions) but that's not a reason enough to claim that investing in stocks is a mugs game.The simple fact of the matter is that brokers push DCA because it is an easier sell to people who are worried about stock market volatility. However, they do not like to admit that it also offers comparatively poorer returns.
I agree with you 100%! And I've learned something from you and charttrader that I hadn't thought about before but I still think the paper I linked to above gives a more balanced picture of the strategy than a blanket dismissal.Think about it logically, the stock market offers the greatest returns of any asset class because it entails the greatest risk. By reducing your risk exposure through DCA, you also reduce your potential return.