Invest Skeptically

RRSP “season” will be arriving soon in Canada and savvy financial advisers will use this opportunity to sell their clients on pre-authorized regular contributions towards their retirement savings plans. Dollar cost averaging, they’ll say, is the strategy to go with.

While it makes sense from a psychological point of view to buy over time and–hopefully–take advantage of market volatility (i.e. buy more shares lower prices and less shares at higher prices), my personal take is that dollar cost averaging is a good tool for saving & investing over time rather than a prudent investment strategy. To me, it doesn’t make any sense to allocate money to risky investments and then let it sit idle because you want to dollar cost average your way in.

Some links:

• Two instances of academic arguments against the strategy, versus lump sum investments, are Knight and Mandell (1993), and, Greenhut (2006).

• The folks over at MoneyChimp have created this calculator to back-test the two strategies (dollar cost averaging versus lump sum) and concluded that the dollar cost averaging “advantage looks like a myth”.