Tuesday, April 20, 2010

Dollar Cost Averaging Part II

In part I I discussed putting money away every month for investing. Dollar Cost Averaging in this case is just a side note, as really you don't have a lot of other choices other than not investing at all. Given the choice, I'd always recommend investing. In this part I'll discuss what to do when you receive a large amount of money that you want to invest. A problem I'm sure we all wish we had.

In the Wealthy Barber, he suggests that you use the same dollar cost averaging technique. Rather than putting the money in one lump payment, you can avoid the instability of the market by spreading it out over the year or longer. Again this just made sense to me and until recently it was what I was planning to do if money ever happened to fall into my lap.

However, in my search for real number, rather than the make believe ones always given as an example, I stumbled across a few interesting articles. This method has been taught for a very long time, but in reality it is not as effective as you might think. First off every transaction you make has fees associated with it. So multiple transactions is not in your best interest, if you can avoid it. Second, if the return on the investment is greater than your banks interest (which it almost always is), then you're losing out on potential income.

Just like a fixed rate mortgage there is some piece of mind associated with dollar cost averaging. Also, just like the fixed rate mortgage you're paying for that piece of mind. Almost every time you're better off investing in a lump sum amount.

The suggestion for this post came from the comments on here. I'm sure it's not exactly what he was hoping for, but unfortunately it's all I have time for right now. If anyone else has any suggestion, feel free to drop me a comment or e-mail.

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