How often should one use dollar-cost averaging?
Trivially, a dollar cost averaging (DCA) strategy must be
used at least twice! More seriously, DCA is a discipline
that people (typically investors with relatively small
amounts of money to invest each month or each quarter)
use to avoid succumbing to the temptation
to "time the market". As mhoran_psprep points out, it
is well-suited to 401k plans and the like (e.g. 403b plans
for educational and non-profit institutions, 457 plans
for State employees, etc), and indeed is actually
the default option in such plans, since a fixed
amount of money gets invested each week, or every
two weeks, or every month
depending on the payroll schedule. Many plans offer just
a few mutual funds in which to invest, though far too many
people, having little knowledge or understanding of
investments, simply opt for the money-market fund or
guaranteed annuity fund in their 4xx plans. In any
case, all your money goes to work immediately since
all mutual funds let you invest in thousandths of
a share.
Some 401k/403b/457 plans allow investments in stocks
through a brokerage, but I think that using DCA to
buy individual stocks in a retirement plan is not a good
idea at all. The reasons for this are that not only
must shares must be bought in whole numbers (integers)
but it is generally cheaper to buy stocks in round lots
of 100 (or multiples of 100) shares rather than
in odd lots of, say, 37 shares. So buying stocks weekly,
or biweekly or monthly in a 401k plan means paying more
or having the money sit idle until enough is accumulated
to buy 100 shares of a stock at which point the brokerage
executes the order to buy the stock; and this is really not
DCA at all. Worse yet, if you let the money accumulate
but you are the one calling the shots "Buy 100 shares
of APPL today" instead of letting the brokerage execute
the order when there is enough money, you are likely to
be timing the market instead of doing DCA. So, are
brokerages useless in retirement fund accounts? No,
they can be useful but they are not suitable for DCA
strategies involving buying stocks. Stick to mutual
funds for DCA.
Do people use it across the board on all stock investments?
As indicated above, using DCA to buy individual
stocks is not the best idea, regardless of whether
it is done inside a retirement plan or outside.
DCA outside a retirement plan works best if you
not trust yourself to stick with the strategy
("Ooops, I forgot to mail the check yesterday; oh,
well, I will do it next week") but rather, arrange
for your mutual fund company to take the money
out of your checking account each week/month/quarter
etc, and invest it in whatever fund(s) you have chosen.
Most companies have such programs under names such
as Automatic Investment Program (AIP) etc. Why
not have your bank send the money to the mutual
fund company instead? Well,
that works too, but my bank charges me for sending
the money whereas my mutual fund company does
AIP for free. But YMMV.
Dollar-cost averaging generally means investing
a fixed amount of money on a periodic basis. An
alternative strategy, if one has decided that
owning 1200 shares of FlyByKnight Co is a good
investment to have, is to buy round lots of 100
shares of FBKCO each month. The amount of money
invested each month varies, but at the end of the
year, the average cost of the 1200 shares is
the average of the prices on the 12 days on which
the investments were made. Of course, by the end of
the year, you might not think FBKCO is worth holding
any more. This technique worked best in the
"good old days" when blue-chip stocks
paid what was for all practical purposes a guaranteed
dividend each year, and people bought these stocks
with the intention of passing them on to their widows
and children.
