Since the market has a positive mean rate of return, dollar cost averaging usually requires the investor to give up some expected return for the benefit of reduced variance in his eventual outcome. In fact, research has shown that investing a lump sum according to these principles generally results in worse performance as compared to investing the entire sum at separate times (Constantinides, 1979). However, the investor can expect a reduction in the variance of his performance by implementing dollar cost averaging. While dollar cost averaging can help to limit the downside of a worst-case scenario of an immediate drop in asset value after the lump sum is invested, most market research has shown that such drop-offs are relatively rare compared to the strong emphasis the strategy puts on avoiding them.
Another formulaic investing strategy is called value averaging. In contrast to dollar cost averaging, this technique aims to invest an amount in each period such that a target investment value is achieved in each period. In some cases, value averaging will call on the investor to sell some of his asset if the target is surpassed. It is more complicated than basic dollar cost averaging but has been shown to produce superior results.
Dollar cost averaging has been widely criticized by economists and academic finance researchers as more of a marketing gimmick than a sound investment strategy (a way to gradually ease worried investors into a market, investing more over time than they might otherwise be willing to do all at once). Numerous studies of real market performance, models, and theoretical analysis of the strategy have shown that in addition to having the admitted lower overall returns, DCA does not even meaningfully reduce risk when compared to other strategies, even including a completely random investment strategy.
Constant-dollar inventories, sales, and inventory-sales ratios for manufacturing and trade: revised estimates.
Sep 01, 1987; Constant-Dollar Inventories, Sales, and Inventory-Sales Ratios for Manufacturing and Trade: Revised Estimates The constant-dollar...
Constant-dollar inventories, sales, and inventory-sales ratios for manufacturing and trade: revised estimates, 1985:I=1988:II. (illustration)
Sep 01, 1988; The constant-dollar inventories, sales, and inventory-sales ratios have been revised beginning with 1985 to incorporate new...