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Suppose that I just received a large sum of money, that I want to use to buy stocks.

Is there an advantage to split my stocks purchases over a period of time, to protect me against the risk that today's prices are "a bit higher than they should be", or should I just buy them and be done with it?

  • Thanks @Chris. Any idea how meaningful dollar cost averaging is? Can someone quantify this? Remember that buying all now has a definite advantage in the fact that you "get this over with". The question is is it disadvantages to your portfolio, and by how much. – ripper234 Apr 3 '11 at 13:46
  • Invest based on the fundamentals of the company and a margin of safety. If the numbers work out and it's a good investment now, then buy it. Dollar cost averaging (in my opinion) is basically saying you're not confident in the investment...which if that's the case you really shouldn't be buying it. – The Matt Apr 3 '11 at 18:46
  • @Matt - I'm investing in large index funds, without doing any specific analysis, on the premise that long term, it will rise. – ripper234 Apr 4 '11 at 5:32
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    For large index funds which are considered to reflect the health of the economy, I think your premise is right. Dollar cost averaging is a good way to minimize risk and reward in this case. I hope you choose a discount broker to save on transaction costs – Victor123 Jan 13 '14 at 3:43
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When you hear advice to buy index funds, that usually comes with two additional pieces of investment discipline advice that are important:

  1. dollar-cost-average
  2. diversify across asset classes and then rebalance regularly

These two elements are important to give you relative predictability in your outcome 20 years from now.

In this old blog post of mine I linked to Warren Buffett talking about this, also mentioned it in a comment on another answer: http://blog.ometer.com/2008/03/27/index-funds/

It's perfectly plausible to do poorly over 20 years if you buy 100% stocks at once, without dollar-cost averaging or rebalancing. It's very very very plausible to do poorly over 10 years, such as the last 10 in fact. Can you really say you know your financial situation in 20-30 years, and for sure won't need that money?

Because predictability is important, I like buying a balanced fund and not "pure stocks": http://blog.ometer.com/2010/11/10/take-risks-in-life-for-savings-choose-a-balanced-fund/

(feel a little bad linking to my blog, but retyping all that into this answer seems dumb!)

Here's another tip. You can go one step past dollar cost averaging and try value averaging: http://www.amazon.com/Value-Averaging-Strategy-Investment-Classics/dp/0470049774 However, chances are you aren't even going to be good about rebalancing if it's done "by hand," so personally I would not do value averaging unless you can find either a fund or a financial advisor to do it for you automatically. (Finance Buff blog makes a case for a financial advisor, in case you like that more than my balanced fund suggestion: http://thefinancebuff.com/the-average-investor-should-use-an-investment-advisor-how-to-find-one.html) Like rebalancing, value averaging makes you buy more when you're depressed about the market and less when it's exciting. It's hard.

(Dollar cost averaging is easily done by setting up automatic investment, of course, so you don't have to do it manually in the way you would with value averaging.)

If you read the usual canonical books on index funds and efficient markets it's easy to remember the takeaway that nobody knows whether the market will go up or down, and yes you won't successfully time the market. But what you can do successfully is use an investment discipline with risk control: assume that the market will fluctuate, that both up and down are likely and possible, and optimize for predictability in light of that. Most importantly, optimize to take your emotions and behavior out of the picture.

Some disciplines for example are:

  • index fund plus diversification plus rebalancing plus dollar-cost/value averaging
  • "value investing" in Benjamin Graham / Warren Buffet sense with margin of safety, willingness to hold cash or bonds, and high deviation from index benchmarks. it's hard to tell which managers truly stick to this discipline, so index funds are much more reliable. and few people have the temperament and expertise to do this themselves. think "years of intense study and zen calm while losing tons of money"
  • John Hussman's dynamic hedging based on normalized valuation and other statistical analysis http://hussmanfunds.com/ (this is an obscure one, just pointing it out as an example of a discipline)
  • use options to put a collar around an equity index fund; there used to be a no-load fund called the Gateway Fund that did this, but it now charges a load, sadly. There's also a Bridgeway Balanced fund that does it or something similar, I think.

there are dozens out there, many of them snake oil, I think these I mentioned are valid. Anyway, you need some form of risk control, and putting all your money in stocks at once doesn't give you a lot of risk control.

There's no real need to get creative. A balanced fund that uses index funds for equity and bond portions is a great choice.

  • Incidentally, if I remember right that value averaging book I linked has some quantification on lump sum vs. dollar cost vs. value averaging. But I really think the true purpose of these disciplines is risk control, rather than higher returns. – Havoc P Apr 3 '11 at 17:39
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It would depend on a) Ones view on Markets and b) Ones nature.
If one believes that the market would be going up in the near future then it would be best to buy all at once. If one believes the market is uncertain, it would make sense to invest over a period of time.
If one is a disciplined investor and can stick to plan, it would make sense to invest over a period of time as the risk is generally less. How much less is again subjective.
If one is not a disciplined investor then buying now and getting done with is a good idea.

As to exactly quantifying this is absolute number for future would not be possible. One can take the data from past, however it would work advantages if the prices moves up and disadvantages if the price moves down.

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Depends on what you are, an investor or a speculator. An investor will look at an 'indefinite' investment period. A speculator will be after a fast buck.

If you are an investor, buy your stock once as that will cost less commissions. After all, you'll sell your stock in 10, 15, 20 years.

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    For example, Warren Buffett says buy index funds but "you want to make sure you don't put all your money in at once because you might pick just the wrong point." For example, you may have picked the peak in 1999-2000 and you'd be underwater 11 years later. Warren is not a speculator and investors would do well to be prudent and avoid putting all their eggs in one point in time. (cnbc.com/id/23522706 links to a PDF with this Buffett quote). – Havoc P Apr 3 '11 at 17:07

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