Take an example of Lost Decade (from 1/1/2000 to 12/31/2009)
Instead of making one giant investment, let's invest $1,000 per month during
this 10 year period in the S&P 500 index. Based on what we know about dollar
cost averaging, we should be buying random amounts of shares depending on
how the market is doing at that snapshot in time. For simplicity, we'll
assign a cost of $0.01 to each point of the index (for example an index
reading of 1000 would cost $10 per share).
So did we make some money? Well, no. This time we lost 6.8% of our money.
Here is the performance chart
(圖貼不上來)
You may think Lost Decade is not an good example, let's take a look at 1-year
performance of 2009, 2010, 2011 DCA vs Lump Sum.
Assumption:
10,000 will be invested in a market investment, following two different
strategies: (a) the whole amount will be invested on the start date; and (b) equal amounts
will be invested at the start of every month for a year, during which the
remaining cash will stay invested in a bank account at a guaranteed interest
rate.
The market investment is an S&P 500 index fund with annual fees of 0.2%.
The bank account interest rate is 0.1%
2009: Lump Sum = 12415, DCA = 12123
2010: Lump Sum = 11046, DCA = 11107
2011: Lump Sum = 9919, DCA = 9830
2012: ???
DCA will win if your start date falls right before a dramatic crash (like
Mar 2009). But unless you can predict these downturns ahead of time, you
have no scientific reason to believe that dollar cost averaging will give
you an advantage.
So, here is my point:
1. DCA only can not guarantee you have a better return, can not guarantee
you not lose money. It is more of a myth. It may smooth out your portfolio
performance over time, so you do not do panic sell.
2. You need to use other strategies, not just DCA only, to produce better
return.
3. (Not related to this topic) Time is on your side, the only advantage
you have against professional MM is time.
2&3 有點“華山論劍”， 點到為止，每一個都可以引出長篇大論，象asset allocation就
有許多方法，如到底是否include PM, 是否include currency. If include currency,
Swiss Franc是不是best choice?
投資是非常complicated event. Every strategy has its own advantage and disadvantage.
There is no such kind of strategy as "set it and forget it" and you still
make money.
