Retiring Early

Thursday, November 02, 2006

The downside of dollar cost averaging...

I wandered into a Barnes and Noble bookstore this weekend to pass the time while I was waiting for my wife. Of course, I gravitated to the investment / personal finance/ retirement section and started to browse. I came across a book by Ben Stein and became intrigued by a little section in the back called "25 Big Truths of Retirement Planning" Naturally, I started measuring my retirement efforts against the sacred list of 25. While I had most of the items covered, two of the items were interesting and warrant some discussion. The first I'll talk about here and the second I'll reserved for another post entirely.

Ok, so you probably guessed that he said something about dollar cost averaging, right? So what did old Ben say about DCAing? Well, since about 99% of us who employ some form of DCAing are basically trying to ease into a position and effectively trying to time the market to get the position at the best price. What most of us forget is that at some point -- even if we're long term investors -- that we'll eventually be selling some or all of the position.

So our friend Ben called to light the fact that in retirement, the benefits of dollar cost averaging are effectively neutralized because you need to sell your positions at specific times for living expenses. He doesn't go on to give perscriptive guidance, but he made the point and I think it's certainly valid to consider. This isn't to say that you shouldn't employ DCAing, but you will need to be smart about how and when you withdraw in retirement.


  • At 11/02/2006 4:23 PM, Anonymous Anonymous said…

    Interesting point. I think the effects are somewhat offset but not neutralized due to the compounding that will happen in the meantime until you sell... If you are saving from income over time the alternative is to market-time which the vast majority of investors will get wrong.

  • At 11/02/2006 7:10 PM, Blogger fin_indie said…

    "offset" vs. "neutralize" is a good clarification -- it's always nice having a Prof around to hammer you on semantics :)

  • At 11/06/2006 5:39 PM, Blogger The Sarcasticynic said…

    Lately, I've seen a lot of DCA bashing. Most of the time, the critics state that performance is poorer than investing the entire sum at one time. Though I don't question the stats, I doubt the intent of DCA was ever to be a beat-all investment tool. Rather, it is supposed to be better than not getting into the stock market at all. It's a poor man's investment vehicle, not a rich man's. DCA is often mentioned in conjunction with payroll deduction and dividend reinvestment. Not exactly the environment DCA detractors would have us frequent.

  • At 11/07/2006 6:53 AM, Anonymous Anonymous said…

    Most people dollar cost by default - they invest as they get paid.They don't have a large sum to invest at one time.

    During retirement, they take money out on a schedule to pay bills. The slight gain from dollar cost while saving typically becomes a slight loss as they withdraw. In essence they are in their own personal bear market.

  • At 11/08/2006 10:48 AM, Anonymous Anonymous said…

    Like so many ideas people use to reduce barriers to investing, DCA works well in certain scenarios, but not in others.

    In a persistently advancing market, offset is the right term. Your going in price is kept lower than what most market timers actually pay on the average, so your spread likely is most likely significantly higher when you sell.

    In a mixed or declining market, you may still get some help from the cost averaging side of the process, but on the sell side, the small investor frequently is forced to sell on the drop, even below the delayed quote they see via some online service or another. And is forced to pay a premium for "real time" activity. So, adding the inhenernt drop in market price to the costs of transacting business adds injury to insult.

    So,is it unreasonable to say that this tends more toward the idea that the possible benefits of DCA on the accumulation side will be slashed on the liquidation side of things....if the costs and losses are high enough, the result is a slash and burn,

    Worse, if they get bumped up a marginal Federal and State tax bracket or two and it impacts things such as Social Security, itemized deductions,people will have relied upon the idea to their sheer detriment, and that IS something to grieve, ESPECIALLY if they can point to a time weighted average for demand deposits or a tax deferred annuity and clearly show they stand to benefit better during retirement from such alternatives, and why oh why weren't these presented as worthy alternatives....

    Clearly, for many people, a liquidation and withdrawal plan is not necessarily the optimal way to enjoy the fruits of their thrift, and it is in their interests to thoroughly investigate alternatives, and to prudently make their choices.

    On the subject of how to position assets, when to buy/sell, etc...maybe we need a "String Theory?"

  • At 11/08/2006 11:01 AM, Anonymous Anonymous said…

    On the subject of DCA again, the first operative term that is begging a howdy is that DCA stands the highest chance of fostering "diversification."

    How do we define it? If we invest in all types of different sectors, geographies, sizes of entities,corporate life phase (growth, intrinsic growth, extrinsic growth, small cap, midcap, large cap, market share management phase, etc) etc.. and their correlations to the market in general and to each other are highly similar mathematically speaking, are we holders of a diversified portfolio? And, how many dimensions does this diversification have, one, two, many? MPT is basically a two dimensional paradigm...and that kinda worked back in the pre-globalization days of a rock solid SEC, highly regulated banking, and firmly fixed interest rates...and a fairly stable Federal Deficit... but now? And, given the accounting issues that have presented themselves during the last twenty some odd years, how do we get a better handle on a firm's current or potential profitablity? Its' TRUE PROFITABILITY? And, are shareholders given a fair share of that, a dividend that at least competes with the market and management risk weighted time value of a demand deposit, or is the fruit simply engorged before it falls off the tree by a class of persons who add little if no value but who in service of self alone, feel more entitled by virtue of having clawed their way to the top of the behavioural sink?

  • At 12/19/2006 12:30 PM, Anonymous Andrew Davis said…

    There is now a way to get the benefits of dollar cost averaging when selling in retirement. This is true reverse dollar cost averating. Also a way to improve dollar cost averaging when buying. Learn how to free at


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