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The Journal of Wealth Management

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Article

Dollar-Cost Averaging, Asset Allocation, and Lump Sum Investing

Kamphol Panyagometh and Kevin X. Zhu
The Journal of Wealth Management Spring 2016, 18 (4) 75-89; DOI: https://doi.org/10.3905/jwm.2016.18.4.075
Kamphol Panyagometh
is an associate professor in finance at NIDA Business School in Bangkok, Thailand. kamphol@nida.ac.th
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Kevin X. Zhu
is an assistant professor in finance at the School of Accounting and Finance of the Hong Kong Polytechnic University in Hung Hom, Kowloon, Hong Kong. afkzhu@polyu.edu.hk
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Abstract

Both practitioners and academics have long disputed whether investors should choose dollar-cost averaging (DCA) or lump sum investing (LS) as their investment strategy. While the issue still has not been completely settled, this study shows that an endeavor to make a performance comparison between DCA and LS might not be completely relevant. In this article, we demonstrate theoretically, numerically and empirically, that DCA is approximately equivalent to an asset allocation strategy in which about 50%–65% of wealth is invested in risky assets and the rest in riskless assets, while LS is the same as a 100% risky asset allocation. With different proportions of risky assets, DCA and LS are suitable for different types of investors with different levels of risk tolerance; thus, DCA and LS should not be compared. We emphasize that DCA should be recommended only to moderately risk-averse investors and should be compared with a 50%–65% risky asset allocation instead of to LS. Compared with a 50%–65% risky asset allocation, we also show that DCA is ineffi cient, as it lies below a capital allocation line. Thus, investment advisors should recommend DCA to their clients with caution because a 50%–65% risky asset allocation is superior to DCA.

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The Journal of Wealth Management: 18 (4)
The Journal of Wealth Management
Vol. 18, Issue 4
Spring 2016
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Dollar-Cost Averaging, Asset Allocation, and Lump Sum Investing
Kamphol Panyagometh, Kevin X. Zhu
The Journal of Wealth Management Jan 2016, 18 (4) 75-89; DOI: 10.3905/jwm.2016.18.4.075

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Dollar-Cost Averaging, Asset Allocation, and Lump Sum Investing
Kamphol Panyagometh, Kevin X. Zhu
The Journal of Wealth Management Jan 2016, 18 (4) 75-89; DOI: 10.3905/jwm.2016.18.4.075
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  • Article
    • Abstract
    • DOLLAR COST AVERAGING AND ASSET ALLOCATION
    • DCA Portfolios vs. AA Portfolios
    • Risk Comparison Between DCA and Equivalent AA Portfolios
    • EMPIRICAL STUDY
    • Data
    • Empirical Results—U.S. Market
    • Empirical Results—Other Markets
    • CONCLUSION
    • REFERENCES
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