What's more, incremental investment at varying prices tends to subdue the effects of market volatility on a portfolio. Of the 1,021 rolling one-year investment periods Vanguard tested for the U.S. markets, LSI portfolios would have fallen in value during 229 periods (22.4 percent of the total), vs. only 180 (17.6 percent) for DCA investors. The average LSI loss for those down periods (based on a beginning portfolio of $1 million U.S.) was $84,001, vs. only $56,947 for DCA investor, whose larger allocations to cash in the first three years helped protect the portfolio from market declines.
Given that the ending balances in Vanguard's trials were fairly marginal, perhaps dollar-cost averaging provides a psychic benefit to some that's worth the trade-off in return. But there is a trade-off, especially longer-term. When your investment horizon is years or decades, staying in cash or bonds is the riskier option, not the prudent one, because you're almost certain to sacrifice gains you could have gotten in equities.
Reader Comments (