Saturday, August 15, 2009

Dollar Cost Averaging – Practical Lessons From Recent Experience

My recent experience with Dollar Cost Averaging and the lessons I learned

Several posts ago I discussed my considerations on Dollar Cost Averaging and why I had selected it as my long term investment strategy.

I've been at it for 4 months and have shown the necessary self restraint, avoiding any impulse buying and selling and sticking to my original investment plan which includes investing a fixed, identical sum at the start of every month into a well diversified ETF portfolio.

It hasn't been as easy as it may seem. This is a good indication on my part. "Easy" usually doesn't lead to good results.

After short 4 months I've already learned several lessons I'd like to share in case some of you have decided to try Dollar Cost Averaging as well.

Lesson #1 - Speaking about self discipline and exercising it are two different matters

The idea is simple. Invest a fixed sum of money at each given period and average out sharp movements in asset prices. Drops in prices will be smoothed out by investments made during times of low prices (and the other way around as well, of course). Dollar Cost Averaging exposes an investor to less risk and therefore less return.

The challenge begins when we decide to implement Dollar Cost Averaging. When we save for retirement we usually take the money invested each period as a given and constant sum which we don't really have to think consider since this is a life term investment.

When investing our monthly savings things change. The level of commitment required from us is higher as we are in control of the funds invested. Suddenly we have to make the investment ourselves; committing to the asset of our choice and accepting the fact we are locking money for the long term.

Keeping to Dollar Cost Averaging when markets are peaking is challenging as well. Investing when you are sure the market faces a breather and a period of earning realizations is not an easy feat.

It is important to keep in mind our initial investment strategy and stray as little as possible. Remember why you adopted it at the first place. So far I've been able to keep to decision making but it was not as easy as I had though it to be.

Lesson #2 - Timing the markets is inherent in our psychology and is difficult to root out

I simply can't avoid timing the markets. Dollar Cost Averaging is probably one of the investment strategies which offer the most temptation to time the market as investments are made periodically.

Think of a scenario in which the market has rallied for 3 months (Like the past 3 months). Would invest, yet again, knowing full well the market is scheduled to take a breather? The same goes for bearish markets during which the temptation to buy more increases significantly.

Again self discipline is crucial for succeeding. Deciding to utilize Dollar Cost Averaging means abandoning the effort to time the market and recognizing them to be futile.

Lesson #3 - The long term is an obscure concept which is counter-intuitive to the human psychology

Again, my experience has taught me the long-term is one of the most obscure concepts in investing. Often mentioned but only rarely understood.

I believe long term investment actually contradicts human psychology and is very hard to maintain. When managing your own portfolio the urge to keep tabs is enormous. I haven't met anyone who can resist the temptation to monitor the portfolio daily or at best weekly or monthly.

In all sincerity, we may say long term but hope for short term. Again, self discipline and restraint are key traits for success.

In the meantime, and due to my rather lucky starting point I've managed to generate just over 10% in returns over the past 4 months which have been exceptionally well. I hope for a long term average of a yearly return of 6%.

Related Posts:


Anonymous said...

I received $40,000 daily for 20 days from
Welcome to
We are a private investment company specialising in early-stage investments in innovative and high potential companies, either as principal or co-investor.
We support business over several development stages and financing rounds on the way to becoming a leading player in your market.
100% Investment Insurance
We have teamed up with a select group of Private companies and investors to offer 100% principal investment insurance for all of our investors. This group

has agreed to insure all principal deposits for a share of our monthly earnings. This allows our group to diversify their investment portfolio and create a

risk free, highly attractive, and profitable investment opportunity for our investors.
1.Your interest is 50% - 500% daily for 20 days depending on the amount you have on deposit.
2.We pay daily directly to your e-currency account. You do not have to make withdrawal requests.
3.Principal is included in your daily payouts.
4.The minimum deposit is only $500 and there is no maximum.
5.No compounding. But you may make additional deposits at any time. Each new deposit is treated individually.
I deposit $20,000 in and receive $40,000 daily for 20 days in my Libertyreserve account on time.
Received my 5th payment....
Date: 2009-08-23 18:53
Batch: 188403xx
From Account: U4556076 (SeriousInvestorHome)
Amount: $40,000.00

More information

Mail to me if you made a deposit use my referral link.I will return 10% of your spend instant.100% guaranteed money back.
MY email:

Make $50k libertyreserve money daily on forex trading
Read news about hyips.make money fast and easy

More news about paying hyips

Post Your AD on 1000+ Forums
The Best HYIP Rating. The Fairest High Yield Investment Programs Monitoring Service

Brian said...

It just takes discipline. I've been DCA for 2 years now into indexfunds. They are all in retirement accounts. It you can be confident that you won't touch the money for a long LONG time, then its easy not to worry about daily, weekly, monthly and even yearly fluctuations.

Rick Carstens said...

rightly said talking about the discipline and exercising it are far way two different things.. this is a really informative post. thanks for it