# Lump Sum vs. Dollar Cost Averaging



## brilliantmichael (14 October 2007)

Is it better to buy lump sum or dollar cost average when building up a position?

Understandably it depends on the situation. For example if there's a particularly severe crash, it might pay better to throw in the lot rather than average out.

Conversely it may be better to average out when building a position that, for example, is on a down trend and you're speculating is meeting resistance sometime soon, but may still have further to fall.

Also might dollar cost averaging reduce returns because you might "miss the boat" when an issue rises?


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## brettc4 (14 October 2007)

*Re: Lump Sum V.S. Dollar Cost Averaging*

My  , provided you aren't trying to make a short term gain, I would do a lump sum.  Primarily because I believe the market will go up so dollar cost averaging will over time result in a higher entry price.

Also with dollar cost averaging, you will have most brokerage fees to overcome, for example,

$10,000 lump sum may be $20 in brokerage.
$1,000 * 10 will be $200 brokerage over 10 trades
Means the share has to go up even higher for the same outcome.
Lastly, Capital Gains tax calculation is hard as you need ot keep track of each purchase. Not a big negative, but a negative none the less.

All that being said, if you do not have the money for a lump sump now, entering will smaller amounts if better than nothing.


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## bvbfan (16 October 2007)

*Re: Lump Sum vs Dollar Cost Averaging*

Maybe this should have been a poll?

I prefer dollar cost averaging if I'm building a long term position.

For speculative stuff though it's easier to buy a set amount.


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## tech/a (16 October 2007)

*Re: Lump Sum vs Dollar Cost Averaging*

Seems that none here are using position sizing and Money Management principles/models.

If you were it would *clearly* be a single position.


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## rub92me (16 October 2007)

*Re: Lump Sum vs Dollar Cost Averaging*

Imho averaging down equals endorsing an initial bad decision to put money in a stock by putting even more into it, _hoping_ you were right after all and it will turn around. I like to sit on the positive side of the trade and if it moves my way I would think about adding to my position if I had the money available.


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## nizar (16 October 2007)

*Re: Lump Sum vs Dollar Cost Averaging*



rub92me said:


> Imho averaging down equals endorsing an initial bad decision to put money in a stock by putting even more into it, _hoping_ you were right after all and it will turn around. I like to sit on the positive side of the trade and if it moves my way I would think about adding to my position if I had the money available.




Can't disagree here.

For discretionary trading, if you are taking a long term view, then buy a full parcel on your signal, and keep pyramiding as she climbs, raising the stop under the nearest levels of support everytime.


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## tcoates (16 October 2007)

*Re: Lump Sum vs Dollar Cost Averaging*

Different schools of thought here. If you go back to the classics (early 1900s) then people like Livermore (and I believe those from the Wyckoff camp) would have you buy the stock in a number of parcels. 

As a simple example, if you had $9000 to invest (total amount for this stock/trade) then you would split it into 3 parcels of $3000. If the position went against you you would lose less than if you had invested the total amount.

Then depending on your averaging up rules you then buy the other parcels when the stocks move in your favour.

In some way it makes sense to average up, better to put money into a winner than to take another guess on a new stock?

Tim


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## nizar (16 October 2007)

*Re: Lump Sum vs Dollar Cost Averaging*



tcoaates_au said:


> In some way it makes sense to average up, better to put money into a winner than to take another guess on a new stock?
> 
> Tim




Hi Tim,

Yes my research has proven this fact.
The win% is higher if you are picking a winner you already hold compared to buying a new stock.
Profit stats are higher when i tick the box to "favour pyramid trade" in TradeSim.


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## tcoates (16 October 2007)

*Re: Lump Sum vs Dollar Cost Averaging*

Nizar,

Yes. For me it was more of a rhetorical question 

I think the problem (if you call it that) is when you average up or buy the additional parcels. Some would have you buy after the stock as reached a certain percentage gain (2/3/5 vs 15%) whereas and...

...from what I have read on other forums re Livermore, it seems his system was more based on double bottoms was to probe near the bottom (support), and the other parcels were purchased somewhere in the pivot range. Unfortunately the pivot range was never really defined, though people believe it to to the more recent high in the double bottom. (hope that makes sense).

And a third alternative is to buy on new highs.


Ahhhhhhh.... too many choices.

Tim


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## shouldaindex (6 September 2015)

*Re: Lump Sum vs Dollar Cost Averaging*

I googled Dollar Cost Averaging and this popped up!   Interesting to see this discussion took place in 2007.

*So we could do an illustration of DCA for 9 months (4 x quarterly), starting from a 20% drop in 2007.*

March = 5500
June = 5100
October = 4000
January = 3600
DCA = 4500 

DCA -20%, Lump Sum -35%

*And do the same, starting from a 20% drop in 2002.*

February = 2800
May = 2900
August = 3100
November = 3300
DCA = 3050 

DCA +9%, Lump Sum +12%

So just using 2 examples, it shows the DCA swing is reduced to 29%, compared to Lump Sum swing of 47%.


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## Junior (6 September 2015)

I think DCA is useful, in situations where you come across a significant lump sum, and you wish to invest in a diversified portfolio, but wish to immediately receive the investment income rather than re-invest.  

An example would be a middle aged person receives an inheritance of $1,500,000.  In light of this boost in their wealth, they wish to reduce working hours and establish a portfolio from which to draw an income stream long term.  Cash rates are very low, so cash/TD is not a realistic option over any time-frame.

As the data in this thread indicates, a DCA strategy won't boost their return in most situations, as markets are rising more often than falling, but it will mitigate the risk of piling funds into the market at an inopportune time - ie. just before a sudden fall in prices.  In that scenario where they are 'unlucky' with their timing, DCA would have mitigated some of their loss in the first year in the markets.

In this sense DCA is simply a lower-risk way to enter markets, compared with a lump sum method.

This strategy is for those who do not believe they are capable of 'timing' their entry.  A sophisticated investor/trader would probably not employ DCA in this manner.


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## So_Cynical (6 September 2015)

*Re: Lump Sum vs Dollar Cost Averaging*



shouldaindex said:


> So just using 2 examples, it shows the DCA swing is reduced to 29%, compared to Lump Sum swing of 47%.




Its all in the timing...always is.


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