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Ease the Anxiety of Entering the Market

Quantifying the Trade-Offs of Dollar Cost Averaging

Recent market turmoil has caused many investors to seek temporary safety in cash. But getting back into the stock market can be frightening. We’ve studied different methods to seek the best balance between return potential and being able to sleep at night.

Contact a Bernstein Advisor

To discuss different strategies for entering the market and to determine the best approach for you, contact a Bernstein Advisor today.

What a historical analysis tells us:

  • Investors Seek Safety in Cash
  • Stock Returns Are Higher but Volatile
  • Three Ways of Approaching the Market
  • Prior Market Behavior Makes Little Difference
  • The Trade-Offs of Entry Strategy
  • Evaluating Your Choices

Learn more about Bernstein’s research on different strategies for entering the stock market.

Research Article

Jump In or Go Slow?

Strategies for Entering the Market
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Opportunity Summary

Ease the Anxiety of Entering the Market

Quantifying the Cost and Benefit of Dollar Cost Averaging
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Trusts & Estates Magazine

(Re) Entering the Market?

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Financial Times

The Law of Averaging

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What is dollar cost averaging?

Dollar cost averaging is the practice of systematically investing a fixed amount of money into the stock market at regular intervals. This way, you get more shares of a stock when its price has dropped and fewer shares when its price has risen—thereby protecting you from buying “at the top” if the market falls after you begin investing. It can be used if you have a lump sum of money to invest, but the same principle applies for people who invest through automatic payroll deductions.

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How do I decide if dollar cost averaging is right for me?

First, consult with your Bernstein Advisor regarding your particular circumstances. Generally speaking, however, a logical way to think of the strategy is as a way to mitigate losses from investing in a falling market. If the market falls after you start investing, dollar cost averaging protects your wealth. Just remember that the policy has a cost: in typical markets, it is 2.9% of one’s holdings. So you should ask whether that price suits you.

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Is there an optimal time period for dollar cost averaging?

When choosing to dollar cost average, a period of up to six months is the most efficient strategy; between six and 18 months offers a reasonable cost/benefit trade-off; and beyond 18 months, averaging in doesn’t make financial sense—unless it’s part of a program like payroll deduction, when the money only becomes available over time.

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Why not “invest on the dips”?

Some investors have tried to improve on the dollar-cost-averaging strategy with various tactics. For example, some watch market signals carefully to attempt to invest before an upturn. Others invest only on market “dips.” We analyzed several of these approaches to see if they boost results, and found that, in typical markets, almost none of the strategies created an improvement over the simple strategy of level monthly investments.

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Why doesn’t “investing on dips”—or similar strategies—work?

In essence, what these strategies do is extend the averaging-in period—in many cases over 12 months or longer—which, as described above, is not cost-effective. Strategies that prolong the market-entry time period also open the door to another risk: if poor markets ensue, you will lose your nerve and stop investing altogether. The biggest risk to a staged investment plan is the temptation to second-guess the market and continue to wait in cash, which can lead to substantial erosion in long-term wealth.

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RESEARCH

Jump In or Go Slow?

Strategies for Entering the Market

In the aftermath of 2008, investors may be holding on to cash, fearful of another market downturn. Many intend to reinvest once the markets show clear signs of improvement. But what is the best way to reenter?

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(Re) Entering the Market?

In this article published in the April 2009 issue of Trusts & Estates magazine, we analyze the costs and benefits of dollar cost averaging to help investors make an informed decision on how to best put their money back to work in the market.