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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 77550  
Subject: Re: Further re DCA and lumpsum investing Date: 3/24/2012 11:37 PM
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Case,

Great question! the reality is - anyone who has the option of DCA, IMHO should not!

If some one is putting away so much a paycheck, great! But that is not dollar cost averaging. Putting a lump some in based on some preset time criteria is timing the market - AND USING BAD INDICATORS. It is not even an argument about whether timing the market is bad. The argument is timing the market based on pulling a time out of the hat is BAD.

Just thought I would reference the first page of that very article you cite.

However, "this decision [DCA] is not supported by any rational decision making (model)," Constantinides says. In fact, the research shows that most of the time you'll end up with more money if you invest a lump sum all at once.

Consider the work done by Gregory Singer, director of research, and Ted Mann, analyst, both with Bernstein Global Wealth Management. They calculated the results of investing in the Standard & Poor's 500 using both lump sum investing, as well as dollar-cost averaging, for all the rolling 12-month periods between 1926 and November 2008.

The average yearly return for the "lump sum" approach, or investing everything at the beginning of the year, was 12 percent. That compares with 8 percent under dollar-cost averaging.



Of all the Pro DCA studies I have read, typically the numbers can never be verified or there's a glaring flaw in the statistics. Mostly - just clearly using the data that supports the position and not the whole data set. Scanning and then picking a DCA time investment schedule on the best days of the years and then comparing to the worst day of the year to put in a lump sum. Or Just putting in the money and then the next day is the crash, never, to your concern, what if just after puting in the DCA money, it crashes.

Your best bet is working on the allocation and deciding, if it is at a price you will pay get in (more for individual stocks than ETFs but still have some relevance as you mention short term bonds which is the percentage discuss we won't start here)

For some cases, suggest:
Decide on the allocation, then decide how you can hedge that allocation for the short term downside protection. Specifically in the areas that concern you.

Put option on SPY, or other ETFs (or call option on the inverse)

Then overtime, slowly decrease the hedge amount.
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