The Freeware Hall Of Fame

What your broker didn't tell you about Dollar Cost Averaging

Who buys a stock when insiders, day traders, and mutual fund managers agree it's too expensive?
Who buys a plummeting stock when no one wants to catch a falling knife?
Who buys stocks at market price rather than looking for the best deal?

Dollar Cost Averaging investors, that's who, because they buy stock ...
not by price, not by opportunity, not by the news, but by the calendar.

Every month when your DCA check arrives the broker places the order.
By design the DCA plan ignores any timing whatever, even the stunningly obvious.

Who do you think benefits from that?

Dollar Cost Averaging is NOT just a way to invest regularly to accumulate shares that down the road will, you hope, have a value greater than your cost. If that's all it were, DCA could be acceptable because steady investing is a lazy way to wealth.

But DCA is more than that. It calls for blind investing, buying shares on a time schedule NO MATTER THE PRICE OR MARKET CONDITIONS.

DCA was created for three reasons: to help the amateur investor invest regularly; to get stocks, bonds, and funds sold without requiring a sales call, and to create a steady commission stream for brokers. When monthly high/low were not far apart it made sense.

Back when DCA came to be, prices were stable. A 1/2 point move was significant. A stock's high for the month was commonly 2 points above the month's low. For the long haul, such small price fluctuation meant it didn't matter whether you bought high or bought low, so long as you regularly accumulated shares in sound, growing investments.

Not today. Today, market makers commonly open stocks 1/4 point up or down from yesterday's close. Moves of a couple of points or more each day are the norm even in stable blue chip large cap stocks like General Electric. Big name momentum stocks can swing 10 to 20 points in weeks, and they are a major part of today's market.

Using DCA in the summer of 1997 you might have bought McAfee at 74 only to find MCAF available at 62 a week later and 54 two weeks after that; or GE at 74 and a week later find it at 63.

You'll be much better off in 10, 20, 30 years if you always buy GE several points OFF its high of the previous 90 days rather than at the high. I'm not saying buy "at the low." Just don't buy at the high.

This isn't "timing." It's merely buying when the goods are going through a temporary mark down in price, as they do every few weeks. Anyone can do that just by paying a little attention.

And did I mention that on any given day a blue chip stock may have a swing of several points during the day? By DCA definition, the trend and current price are ignored by a broker executing a DCA order. He simply places a morning Market Order to buy. That's the most expensive way there is to purchase shares.

That's prudent investing?

I see no validity for DCA today with the exception of mutual funds, and even some fund types are poor candidates for DCA.

DCA is folly for investors. It has the same financial soundness as filling your heating oil tank at the peak seasonal price in the fall instead of filling it in late spring for much less.

Steady investment is a key to profits, but DCA is the key to lower profits. To avoid that and still assure steady investment, make contributions to a savings account monthly, then release the funds to our broker when there's a price pullback in your stocks.

No individual should invest through blind automation. Automation is for complex market programs sophisticated traders use that weigh a set of market factors. DCA is the exact opposite, weighing zero market factors. It calls for buying shares based on calendar date, totally in the dark as to price or trend or market conditions.

This is smart strategy?

DCA was an invention by the brokerages to assure steady business with no sales effort, to produce a consistent commission stream, and to assure there will be buyers on days when the price is high and profit-takers want to sell, yet with some benefit to the customer thanks to the passage of time.

It's a strategy for saps.

(There goes my chance to ever be Wall Street's "Man of the Year")


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Page last updated Dec. 26, 2005
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