Dollar Cost Averaging Myths

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Dollar cost averaging (DCA) seems to be a hot topic of late with many experts saying to continue buying shares, even as they keep falling in price. For those of you who may not understand DCA, it basically means that you continue to buy more shares in companies that you already own as they fall away in price in order to achieve a lower average purchase price. Now I don’t know about you, but I struggle to understand why anyone would want to buy shares in an asset that is falling. Particularly if they can afford to earn more money in other, more stable investments such as corporate or municipal bonds.

If you had dollar cost averaged into well known and widely held companies like General Electric (GE), Citibank (C) or Microsoft (MSFT) over the past 6 months, thinking they had bottomed earlier in the year, you would most certainly be questioning whether this was wise given that shares in these companies continued to fall throughout the year. Similarly, those who employed the dollar cost averaging strategy for many financial or technology companies or ETF’s thinking they had also bottomed mid-year would still be regretting their decision as they could have made (or avoided losing) far more money during this time.

In my opinion, and owing to current market conditions, dollar cost averaging or buying shares as they fall away because they seem “cheap”, is not smart investing for the simple reason that most investors do not know where the bottom is and to buy without knowing is speculating. I have evened questioned the current benefits of dollar cost averaging in 401K/retirement accounts (per this post) for the same reason as above, we don’t know when the market will bottom and it seems like stocks still have a long way to fall.

So why not wait till things stabilize and get a much larger amount of stock at a lower price, rather than smaller amounts at higher prices. You may not pick the exact market bottom, but you will definitely be better off than buying a stock that continues to fall. Only when the market stabilizes and resumes normal behavior, will dollar cost averaging become a “smarter” investing move.

Related Posts:

~ Capital Gains and Losses : Tax Facts and Figures
~ Global Stock Markets Performance in 2008
~ Stock Market Volatility – Now is NOT the Time to Sell

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