What is dollar cost averaging (DCA)? Ken Fisher explains it is investing periodically a little at a time. But isn't that what you do with your 401(k)? You sock away a little each month, probably (hopefully) if you are maxing out your 401(k) each year (which most all of you should be doing – Ken Fisher reminds readers).
Not entirely, as Ken Fisher goes on to detail. Folks portion out their 401(k) contributions because they usually don't have the cash flow all at once to max it out in one month, so they do it periodically. And the IRS limits how much you can contribute each year, so you're forced to spread contributions out over a long time. DCA is different - when folks have a big boodle to invest, instead of plunging headlong into the market, they often do smaller lumps, spread over time. The theory is DCA protects you from investing it all on a "bad" day. Maybe you accidentally invest at a relative high - just before a big correction. Or worse - at the top of a bull market. We all know we don't want to "buy high." Dollar cost averaging reduces the risk of getting "all in" on a bad day - spreading out your cost basis over time.
And yes - it does do that. But does that actually improve your returns over time? Probably not, Ken Fisher notes. But it definitely increases transaction costs - that alone reduces your performance.
Read why and other details of BUNK 14 in Ken Fisher's Debunkery.
