Dollar Cost Averaging

Executive Summary Dollar cost averaging (DCA) is the practice of investing a fixed dollar amount over a period of intervals, typically monthly or quarterly. Whenever an has funds ready and available to deploy in markets, SYM’s best thinking recommends investing the dollars up front in a lump sum rather than gradually trickling them into the markets over time.

SYM’s Independent Research Using several datasets, SYM’s independent research findings were in line with academic conclusions. Markets typically appreciate over time. For that reason, we estimate that an investor is roughly twice more likely to invest at a higher price with a dollar cost averaging scheme than with an up-front lump sum investment (with worse statistics for DCA horizons longer than 3 months).

In the roughly one of three instances where a disciplined DCA investor would have averaged a lower buying price, it’s almost never materially lower. In the very few times that DCA would have considerably improved an average purchase price (i.e. by more than 10%), the investor still would have experienced periods of decline (e.g. at the beginning of the Great Depression or dot-com slide).

Anecdotally, we’ve found that DCA often have less discipline than they expect they will have. While initial declines spook them into further delay, rallies excite them to fully jump on board. This behavior is the opposite of DCA’s “buy more when low” mantra.

Literature Review Based on practitioner papers published in the Journal of Financial Planning, third-party research from Morningstar, articles from a University of Chicago professor published in a top-tier academic journal, and industry research from asset managers such as Vanguard, we consistently find that DCA fails to deliver the benefits implied in some popular press articles and in word-of-mouth investing tradition. This holds true for both 100% strategies and strategies combining and bonds.

According to these experts, DCA is not an effective tool to achieve its assumed benefits. These benefits include buying more shares when prices are low, lowering risk, and enforcing discipline. As Morningstar summarizes, “Both academic and practitioner research has rather unambiguously come down on the side of rejecting DCA as a superior investment approach.”1

1 Dollar-Cost Averaging Truth and Fiction, Morningstar Inc., October 17, 2019.

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An Important Caveat The guiding principle in the dollar-cost averaging versus lump sum debate is straightforward. Markets typically B appreciate over time (and there’s reasonable theoretical justification to expect this to continue in the future, in our conclusion). Therefore, earlier investment puts the odds in your favor. Dollar Value Dollar The chart to the right shows an investor A determining how best to deploy an existing sum of money. However, for an Time accumulator in the workforce, making If one believes the investment markets will move from automatic fixed from a Point A to Point B, waiting to get fully invested can be paycheck deduction is a form of dollar-cost a regrettable decision. averaging, and this is a terrific practice.

Because earlier is better, one would expect such a dollar-cost averaging investor to enjoy stronger investment returns than another accumulator who builds up a lump sum in cash for several years and then later makes a large single investment. Whenever an investor has funds ready and available to deploy in investment markets, SYM’s best thinking recommends investing the dollars up front in a lump sum rather than trying to outsmart the market through timing decisions.

Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. All investing involves risk including the possible loss of principal invested. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request. SYM-19-111

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