Anyone who has had a retail brokerage account is likely familiar with the term “dollar cost averaging.” The original definition of dollar cost averaging, or DCA, is “a regular investment of equal amounts at regular periods of time.” It would be as if you bought $1,000 worth of shares of a security every month for a year or more. Due to market fluctuations, you would sometimes be able to buy more shares when the price was down and less shares if the price rose. After a period of time you may be able to have a better starting point for your investments than if you had invested a lump sum all at once. The theory is that you as an individual cannot time the market and rather than risking your capital by buying at the top of the move, an average is better.
While this may work in theory, in real life as traders we know this is not the case. Brokers caught onto the DCA as a way to increase their commissions and appease clients who may be facing losses. The broker would sell stock to a customer that they believed was a good investment or perhaps something the brokerage had put on a recommendation list. For example, the shares could have been purchased for $20 a share. If the price dropped to $18 a share, the broker could call the customer and tell them to purchase more. Buying more shares at $18 would drop the average cost of the investment to $19 a share. The broker would remind… Continue Reading
