Mathematical Illusion: Why Dollar-Cost Averaging Does Not Work

Mathematical Illusion: FPA Journal - Why Dollar-Cost Averaging Does Not Work:

"This paper examined the behavior of stock volatility, which has given rise through illustrations to the widespread belief that dollar-cost averaging allows more shares to be bought over time than would occur through a lump-sum investment. We have exposed that illustration as a mathematical illusion, based on arithmetic changes in a denominator leading to disproportionate changes in the fraction. We found instead that the price variations that would be expected for fundamentally valued stocks is precisely the pattern that negates the advantage DCA commonly has been illustrated to hold. This result has been confirmed by an examination of the performance of a broad number of stocks, adjusted for the impact of trends on the DCA versus LS outcome. Whether DCA is practiced by investors should be based on their psychological makeup (for example, aversion to regret) and their outlook for stocks, not on an overly simplistic and misleading representation of how stock prices vary."

Ok, if the above paragraphed was too confusing (this is an academic journal), here is the basic synopsis - Dollar Cost Averaging does not lead to higher returns, it is a risk management tool that attempts to avoid drastic downturns immediately after investing one's money - it spreads the risk out. Dollar Cost Averaging doesn't work to increase returns over the long term though - the reason - the market on average, goes up over the long term and you are investing your money and higher and higher prices.

Scott Dauenhauer, CFP, MSFP

On Stuff: William Bernstein

On Stuff

My Favorite author, Dr. William Bernstein gives us the lowdown of the place (or mis-placement) of commodities in your portfolio.

Scott Dauenhauer, CFP, MSP

ING Forced To Disclose

Benefitnews.com - A SourceMedia and Investcorp publication

ING's fees will become more transparent in a settlement with the New York Attorney General.

Now if only someone would take a look at the NEA's Valuebuilder product.

It amazes me that my wife's Union can be so good on a local level, yet on a national level they can fail so badly to protect teachers from 403(b) predators.

ScottyD

Ohio Man Chooses Prison to Stay Financially Afloat

This is the most creative financial planning strategy I have ever seen....though I can't endorse it!

Imagine that you are two years away from collecting Social Security and you can't find a job to keep you afloat. What do you do? Well, my suggestion would be to keep looking, but that would be too much work (pun intended)......You're gonna love this story:

October 13, 2006 (PLANSPONSOR.com) - After holding odd jobs that paid no more than minimum wage, a sixty-two year old Ohio man decided to rob a bank so he could spend the few years before he could start collecting Social Security in prison.

According to the Associated Press, Timothy Bowers, who robbed the bank only to hand the money to a guard while he waited for the police, told a judge that a three-year sentence would suit him, as he turns 63 in a few weeks. The judge complied with his request. Bowers told the judge that he held odd jobs at after the drug wholesaler he made deliveries to closed in 2003, and that he had been unable to find jobs that paid more than minimum wage, to which the judge said "It's unfortunate you feel this is the only way to deal with the situation." "At my age, the jobs available to me are minimum-wage jobs. There is age discrimination out there," Bowers told the judge, the AP said. Bowers handed a note to the bank teller demanding cash and she have him four $20 bills and then sounded the alarm. "It's a pretty sad story when someone feels that's their only alternative," said defense attorney Jeremy Dodgion, according to the AP. Prosecutors had considered arguing against putting Bowers in prison at taxpayers' expense, but they worried he would do something more reckless to be put behind bars.

Adrien Martin editors@plansponsor.com

Greenspan: Housing market worst may be over

Interesting article, could it be true? I certainly hope so, but I think rates will play a big part, as will oil prices.

Scott Dauenhauer, CFP, MSFP

Dow Jones hits record high but Hedge Funds increasingly faltering and closing

Hedge funds, as I've said before are a waste of your time, money, and hopes. More and more are shutting down and all evidence points to Hedge Funds being perenial under performers, not outperformers. In addition, the risk is often not quantifiable. Do yourself a favor and don't waste your time.

Just so you don't think I dislike hedge funds because I can't make money off them (I don't make money off selling investments anyway, I earn my fees by providing advice), I could easily recommend hedge funds to my clients. I don't because I don't feel they are in my clients best interest.

Scott Dauenhauer, CFP, MSFP
949-916-6238
scott@meridianwealth.com

Dow Sets New High...So What?

The Dow Jones Industrials Average has finally risen above where it was on January 14th, 2000, over six years later. If you were solely invested in the Dow Jones you would have had some pretty anemic returns these past several years. In addition, most people who listen to the news think that stock returns have been dreadful, in fact, the opposite is true, stock returns have been extradorinary.

The Dow Jones Average is just a measure of large companies that tend toward "growth", they are just one asset class. In order to have a truly diversified portfolio you need to own many, many different asset classes, i.e. small, large, value, growth, domestic, international, real estate....an on and on.

Would you be surprised to find out that a well diversified portfolio has returned on average over 11% annually since January of 2000? Yes, during the so called "bear" market diversified portfolio's have continued churning out exceptional returns.

Diversified portfolio's will have their ups and downs as well, in fact they trailed the Dow Jones average by 8 - 10 percentage points a year during 1995 - 1999. The point is that over the long run you will be better served by diversifying your money and holding tight through the ups and the downs.....also, don't listen to the news or CNBC, they have no clue!

Scott Dauenhauer, CFP, MSFP