Should you try to market time your dollar cost averaging efforts?
One of my readers recently contacted me via Twitter and asked the following question:
Do you know any article that talks about the right time to increase one's monthly investments when cost averaging?
I did a search to see if I could find something related to that topic, and the best I could do was a post from Austin Pryor of Sound Mind Investing. It's an interesting post that looks at the results of investing in the “favorable period” that happens seven days of each month.
According to this article, there is research that indicates that there are competing theories about when the favorable period of each month takes place. One suggests that the first or last business day of the month is best, and another says that the favorable trading period is the last three trading days of any month and the first two of the next month. But then, the article goes on to say this:
Thankfully, for the investor using a monthly dollar-cost-averaging strategy, it doesn't matter which interpretation of the theory is precisely correct. …
Just do your buying before the other month-end investors start theirs, say on the fifth-to-last trading day of the month. Then, whether the Hirsch theory (seasonality begins with three trading days remaining in the month) or the Fosback theory (seasonality begins with two trading days remaining in the month) is correct, you'll still benefit from the buying that surrounds the turn of the month.
This actually made me smile. My automatic, dollar cost averaging, investments for my Roth IRA and for my emergency fund are made during this time period. And I didn't even plan it that way.
So, while it's kind of a long answer to your question, dear reader, the answer is there. If you plan to take advantage of dollar cost averaging — and especially if you plan to boost your monthly contribution — set it up to automatically buy more shares a little bit before the end of the month.
I'd never really thought about market-timing my dollar cost averaging efforts before; the whole principle behind DCA is kind of against it. And, of course, you don't want to pull your money out. The whole point of the strategy is to keep it in there so that your portfolio can grow, without being eroded by frequent trading and the costs that come with it.
4 thoughts on “Reader Question: When is the Best Time to Use Dollar Cost Averaging?”
Although dollar cost averaging was something I was aware of decades ago, I never really looked into this aspect of it. fascinating article. The averaging concept for investment I used more for buying up more shares in a company which I believed in but whose share price was falling.
Same with me, although I had heard about dollar cost averaging earlier, didn’t quite think about it seriously. Your article is an eye opener I must say. Now I am planning to take advantage of my dollar cost averaging.
I am a big fan of simplicity and wouldn’t even consider setting up a dollar-cost-averaging plan to coincide with a specific time of the month. As far as increasing your monthly contribution amounts – I believe that it can be done at any time, as timing the market if completely futile.
Thanks for this article. Yes, I do agree with the favorable days of the month theory to take advantage of dollar cost averaging.
I did perform my own study on the S&P 500 from 1950 to 2014 and I did find the best days of the month to dollar cost average and this follows the favorable day of the month to invest theory.