Too Cautious Can Be as Bad as Too Reckless

Dollar-cost-averaging sounds like a great way to buy stock. It’s an idea that the professional investment community loves to push, because it’s affordable and convenient for the individual investor. All you have to do is tuck a little money into the stock market – the same amount every month. If prices are dropping, your buck buys more shares. If they’re rising, it buys fewer.

There’s just one thing. It doesn’t work. If, for example, you had invested one lump sum into the S&P 500 at the beginning of 1996, you’d have made 122 percent by the end of 2006. If you had invested the same total amount during that 10-year period but used dollar-cost-averaging, you’d have made only 31.3 percent!

In fact, the only scenario that works for dollar-cost-averaging is if you invest in vehicles that languish for the first seven years or so and then take off. During that 1996-2006 period of time, only four kinds of funds would have given you better gains with dollar-cost-averaging: Gold, Pacific Region, Emerging Country, and Japan.

Dollar-cost averaging – like diversification – doesn’t make you more money. It prevents you from losing more money than you otherwise would in certain market scenarios. Maybe that’s good enough for you. But if you’re convinced that a market or investment vehicle will go up over time, dollar-cost-averaging makes no sense. In other words, if you like an investment, go for it.

[Ed. Note: ETR’s Investment Director, Andrew Gordon, is the editor of INCOME, a monthly financial advisory service that uncovers income-generating stocks that promise safety (first and foremost), along with much-higher-than-average profit potential.]