I was going to write about Dollar-Cost Averaging (DCA) as an investment method in preparation to a post about DRIPs (Dividend Re-Investment Program). But first I was going to find some good sources for information about it.As it is impossible to predict how the market is going to perform, DCA is supposed to be a method that lowers the average cost of the shares you buy by regularly buying shares whatever the price of the shares as opposed to buying shares for a lump sum.

With DCA, you regularly invest for a fixed amount of money. If the price of a share goes up, your fixed amount buys fewer shares; if the price goes down your fixed amount buys more shares. If you have a lump sum to invest, DCA says it is better to invest it by buying shares with it at regular intervals for a fixed amount of money rather than investing it in one go.

When my company takes a percentage of my pay and invests in a pension I am dollar-cost-averaging, but it can’t be any other way. The same is true when I take part in the company Employee Stock Purchase Plan (ESPP).

My short research (using Google) showed that a fair amount of academic research has shown DCA to, at best, to fare no better than lump sum investing, and at worst to be a myth.

So my own approach now is: When it can’t be any other way (pension plan, ESPP, DRIP) I am effectively dollar-cost-averaging, but that does not mean I following the DCA system. If I have a lump sum available, I generally invest the lump sum.

The next part of this post may make this look like a link-farm, but rather than take my word for it, I suggest you look at the following links. I must admit that I’ve got an overweight of anti-DCA links, I’m sure you can find some more pro-DCA links if you want to see more of that side of the story.

First, a more or less neutral link:

• Dollar cost averaging (Wikipedia)

Links describing and extolling the virtues of Dollar-Cost-Averaging:

• Dollar Cost Averaging: A Technique that Drastically Reduces Market Risk
• Dollar-Cost Averaging (DCA) (from Investopedia. Investopedia is a Forbes media company; I’m surprised it doesn’t have a short for and against discussion of the subject)
• Dollar Cost Averaging: Slow and steady wins the race (from Motley Fool)

Against:

• Mathematical Illusion: Why Dollar-Cost Averaging Does Not Work (academic discussion, but stiil readable, I recommend it)
• Does Dollar Cost Averaging Work?
• Dollar-cost averaging’s not all it’s cracked up to be (USAToday)
• The costly myth of dollar-cost averaging (MSN Money)
• Dollar Cost Averaging Will Not Protect You

Some blog posts reactions on Dollar-Cost-Averaging, mostly against:

• Dollar Cost Averaging: A Poor Way To Reduce Risk?
• Dollar cost averaging and assumptions
• Does Dollar Cost Averaging Work?