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Dollar-cost Averaging or Periodic Investing?

So you probably read DCA is not what you think it is and wonder, was my agent/broker wrong? Did he confuse two different investing strategies?

Picture for illustrative purpose only.

Wide variety of readings in this instance would help you better understand, and not rely on one source of reference.

The author at The Simple Sum argues that people use dollar-cost averaging and periodic investing interchangeably while they are actually different. both DCA and periodic investing involves investing at intervals. But the difference is that with DCA, you have a lump-sum of money (think inheritance or a super nice year-end bonus) that you decide to average it into investments over a set period of time. For example, when you have a $12,000 bonus and decide to invest it over the next 6 months on a monthly interval.

With periodic investing you invest the money as soon as you have it – much like when you invest a portion of your salary every month.

DCA is not what you think it is

She does have a point in differentiating.

However, looking at Investopedia:

Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals; in effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices. Dollar-cost averaging is also known as the constant dollar plan.

The author, James Chen, further elaborates:

Dollar-cost averaging is a tool an investor can use to build savings and wealth over a long period. It is also a way for an investor to neutralize short-term volatility in the broader equity market. A perfect example of dollar cost averaging is its use in 401(k) plans, in which regular purchases are made regardless of the price of any given equity within the account.
Picture for illustrative purpose only.

While Andrew Beattie describes:

DCA is a practice wherein an investor allocates a set amount of money at regular intervals, usually shorter than a year (monthly or quarterly). DCA is generally used for more volatile investments such as stocks or mutual funds, rather than for bonds or CDs, for example. In a broader sense, DCA can include automatic deductions from your paycheck that go into a retirement plan. For the purposes of this article, however, we will focus on the first type of DCA.

DCA is a good strategy for investors with a lower risk tolerance. If you have a lump sum of money to invest and you put it into the market all at once, then you run the risk of buying at a peak, which can be unsettling if prices fall. The potential for this price drop is called a timing risk. That lump sum can be tossed into the market in a smaller amount with DCA, lowering the risk and effects of any single market move by spreading the investment out over time.

Hence, it can be said that periodic investing is essentially DCA.

While Sophia of The Simple Sum isn’t wrong, I’m more inclined to the authors at Investopedia in the broader sense of DCA.

To end with a note: I do advise on investment planning and using DCA (or periodic investing, if you prefer). Feel free to get in touch with me for a consultation.

(Related post: Is it time to buy or sell your investment? )


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