Dollar Cost Averaging (DCA)?

DCA gains its popularity especially by the mutual fund (unit trust) investors since it is promoted by the interested parties. What is DCA? One might ask. It is a systematic and regular investment of a fixed amount of money regardless of the price level, meaning that it does not bother the up and down of the market. Investor will get more units when prices are down and fewer units when prices are up.

The promoters claim that by adopting this system, it will reduce investment risk because the risk already averaging out. The most wonderful thing is it needs not your close monitoring to the market. Sound simple and great, isn’t it?

Before we jump into a conclusion whether DCA is practical is a real world or not. Let’s examine what’s your reaction for this scenario:

There are 10 different stalls selling local cuisine. You are having your dinner every evening and you have a freedom to choose which stall you will have your dinner. From the beginning, you might rotate your dinner among these stalls because you want to try something new and you want to know which is the best. After a while, you know exactly Johnny Stall is the best with a reasonable price tag at $ 10 for a dinner. You do not choose others because you know well that for some stalls, the foods might not fresh, the cleanliness of the stalls is not accepted and so forth. Thus, you will go to Johnny Stall for your dinner every evening.



One day, as regular as your previous evenings, you have your dinner in Johnny Stall. After dinner, you pull out $ 10 for the bill. Surprisingly, Johnny presents the bill with a price tag of $ 20! Being curious you ask him the reason. He answer: “I’m not in the good mood today.”

The next day, you go to the same stall and after a dinner, you pull out $ 20 for a bill. This time, Johnny only charges you $ 5.

After several times, you know well that Johnny stall’s dinner is the best and the quality remain the same. The only difference is its bill – it depends to the mood of Johnny. In bad mood times, he would charge you above fair value of $ 10 which can be as high as $ 20. While in his good mood times, he would present you with a same quality dinner but in discounted price, could be as low as $ 5. You need not be a rocket scientist to know when is the best time to have your dinner, don’t you?

We need to have a dinner every evening and thus we have no choice to pay for the bill asked by Johnny. But, for a rational intelligent investor, there is no timeframe for him to invest. It could be no investment made at all for the entire 5 years and when opportunities arise, there could be 5 or more investments made in a year. It all depends to the market – Market is your servant, do not reverse it.



By adopting DCA, it is just insane to invest in whatever price tag. When in real life, you definitely would not buy something when the price tag is far beyond a fair value, will you do it in your investment? When promoters claim that by adopting DCA, it reduces investment risk, so does the return rate of the investment result.

Dollar Cost Averaging (DCA) Again

To continue with the previous post, let me show you an example to make the case lively.

Say like you are a Venetian merchant like Marco Polo. You travel to the east often to trade. Along the journey, there are many unknown and uncontrollable factors waiting for you, ie: pirates, rainstorm, hidden rocks underneath the sea, diseases….etc. As a leader of a merchant, will you initial a journey by a fix interval, say like every quarter, no matter the situation? Or is it more make sense to start the journey after evaluating all the possible risks and you are confident to handle all the risks? Yes, the journey to the east is never easy, for sure there would be many obstacles along the way. If you got the knowledge of how to handle these risks, isn’t increase the chance of success for your trade? Rather than sorely depend to the blind faith of start the journey fixed by interval? Of course, a successful leader must posses firm characters and very often they might be tagged as stubborn. This is because sometimes he has a different view which is totally against from popular view. This is a dilemma that he faces and sometimes he not even get the support from his beloved family or friends. But, this would not stop him from what he believes and with firm characters, it will prevent him stop half way from pursing his goal. Remember the lesson from Thomas Edison? A child tagged with a mark of problematic child becomes an outstanding inventor and also begins his business empire which lasted until today – General Electric (GE).

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Conventional Wisdom IV

4) Dollar Cost Averaging (DCA)

Definition of DCA: An investment strategy designed to reduce volatility in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving.

This is what a mutual fund salesman keen to promote to you: “By investing a fixed amount at set intervals, the investor buys more shares when the security price is low and less when it is high, theoretically reducing the overall cost of the investment.” Sound Ok? Doesn’t it? Since we do not know the trend where’s the market heads on, this is the most sensible strategy to adopt in order to reduce our risks.

Like my sharing posted in Critical Thinking, many times the things sound reasonable superficially but indeed it’s totally out of box of rationality. Put it this way: say like you want to purchase gasoline for your car, would you wait for the best time, meaning when the price of gasoline declines to buy more? Or you just purchase it in fix interval since the price of gasoline fluctuates? Which strategy is more sensible?

DCA is a strategy that already out of fame in the western investment world. But, this strategy gets a hot response especially in Asian countries. The problem underlying for these countries is whenever there is something from western world, they would accept it blindly and treat it like gold. This not only happens in investment world but in every aspect. Whenever your products or services is endorsed or conducted by westerners, the products or services you provide will sell like a hot cake. There is no wonder one of the western trainer says: “It’s very easy to earn from Asian.” Being Asian, pity huh? Though independence, the slave’s mind of colonialism still persist.

Technorati Tags: Dollar Cost Averaging, DCA