Tuesday, January 31, 2012
The Day Pharmadaddy Ate Crow
So I planned on posting a triumphant article about the benefits of dollar-cost averaging versus leaving your RRSP contribution to the last minute. I was going to show the devastating impact of holding onto your money and dumping it in your portfolio on February 28 versus divvying it up over 12 months in smaller amounts. Now, there is no denying that the monthly contribution is better from a psychological perspective in that it is less painful to dole out $1000 a month to your investment portfolio than it is to hand over $12 000 in one sitting. But after doing some research, my preconception has been smashed. I ran two portfolios through Globeinvestor Gold, one purchasing $12 000 in investments on February 28, one purchasing $1000 per month for the same amount of time. The test ran from 2002-present. The damn portfolios ended up almost identical. And then I came across all the academic economics research that debunks the whole theory of the financial benefit of dollar-cost averaging. Sure, in some cases, if you invested lump sums each year right before a massive market crash, DCA will look a heck of a lot better. But on the whole, DCA and lump-sum investing seem to work out quite equal. Damn. I shall eat crow and admit that my hypothesis was wrong. In theory, DCA should win. If you were investing in fixed-interest investments, that would be true. If you held onto your money, you'd be missing out on twelve months of growth. But in the case of a diversified portfolio exposed to volatile stock markets, you could just as likely be missing out on twelve months of tanking markets. Guess I should have seen that coming! Oh well, at least I had the good sense to check the facts first! Hopefully my hypothesis about chasing performance will turn out a lot better!