Lump sum investments into the market usually offer the best returns but dollar cost averaging can help you avoid the pain of unexpected declines.
Bill Flanagan eloquently stated on Moneytalk back on June 2006 that dollar cost averaging (or DCA) was for the timid and not a good idea for getting the best long-term investment results.
Bill made the point if you believe the market is going to be higher in the future, then you should lump sum your money in ASAP. The reason you do this is the odds favor being in the market so the sooner you are in the better your odds are of making maximum returns.
I agree with Bill. I tell new subscribers to my newsletter that if they want to get my advertised returns going forward, then they have to plug their noses, duplicate my portfolio exactly, and mirror my moves exactly. Since I have very large gains and some cushion for short-term losses, I can handle market declines since I would still be up and they would be down. For this reason, I suggest they might want to dollar cost average into my recommended positions to avoid the pain of sudden losses but they will not get my returns going forward.
- If you believe the market will be higher in the long term, then you usually get the best returns going forward if you lump sum into the market. Corrections can be painful, but you are investing for the long term. You only recommend dollar cost averaging if you believe the pain of corrections outweighs the potential for higher returns.
Bob Brinker recommends DCA almost all the time. For example, Brinker has been mostly recommending DCA since he told his listeners in March 2003 that he recommended a fully invested position. Read David Korn's summary of this here. Rare exceptions for DCA by Brinker are after the market has had a significant correction, such as the S&P 500's recent correction where Brinker has a buy in the "mid 1400's."
Bill Flanagan correctly states that the odds favor the market going up so it make sense to lump sum in ASAP in most all situations. He is 100% correct.
Newsletter writers such as Brinker and I have learned over the years that people hate to lose 10% but they hardly complain if they only make 10% rather than 20% from being too conservative. That is they hardly feel 10% in "lost opportunity to the upside" but they feel terrible about an actual 10% loss to the downside. Thus, telling people to dollar cost average helps them not only get into the market but stay in the market for the long term should there be a significant market correction soon after they start their DCA program.
Bill Flanagan is a regular guest host of ABC's "Moneytalk" and author of Dirty Rotten CEOs. Read more about Bill Flanagan here and feel free to offer comments about his dollar cost average comments or this article.
Bob Brinker is the regular host of ABC's "Moneytalk" and author of Marketimer newsletter. We also have a Bob Brinker Discussion Forum that many like to use to discuss the market, Bob Brinker's general advice and Marketimer newsletter.
I look forward to your comments about this article or those radio hosts in general.