Dollar Cost Averaging Debunked?
According to Timothy Middelton’s article over at MSN Money, dollar cost averaging is “a salesman’s tool to prize away in small increments the larger sum he couldn’t talk you out of in the first place.”
My primary problem right now, is that I don’t just have thousands of dollars sitting around that need to be invested. Tammy and I set aside a certain percentage of our paychecks for savings and Roth IRAs (this is after our employer 401ks). By virtue of this circumstance, the only feasible investment strategy we have is dollar cost averaging.
Is Middleton right? He used an example of the past 12 months investing in the Vanguard Total Stock Index Fund. The fundamental problem? He used an example of investing over 12 months. 2004 was an interesting year, but it certainly didn’t represent a market cycle (my definition of a market cycle is a theoretical time period of advances and corrections over 10 to 15 years). To achieve the diversification that you would actually need to invest a lump sum and out perform dollar cost averaging, you would have to have the right mix of stocks, bonds, commodities, and currencies. That’s a lot to predict. And you’d have to continue adjusting that portfolio.
I’m not going to pass judgment on his overall thesis, but his execution of a compelling argument failed. 12 months is not enough time to prove or disprove a market strategy. The law of large numbers seems to indicate that executing the strategies outlined in the article over time would yield the same central tendency. Central tendency refers to an average. In the end, it sounds like dollar cost averaging, to me.