Dollar-cost averaging is popular for investors, but it may not be wise

Stock market corrections, on average, result in drops of 14%

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After weeks like this past one, with the stock market dropping like a lead weight, you will be hearing more about investing strategies that make it easier to sleep at night.

One popular strategy is dollar-cost averaging, an approach in which you dribble money gradually into the market rather than risk your entire wad in a lump sum.

Nobody likes to see their account drop 4% or 5%, perhaps more, just a day or two after they put a big chunk of cash to work. That’s what dollar-cost averaging aims to avoid. By purchasing stocks or stock funds in equal dollar amounts at regular intervals, like once a week or monthly, you wind up paying a blending or averaging of prices.

Sometimes you buy in at high prices and sometimes at low prices, but you never put all your cash to work at what could be a cyclical market top.

Workers who invest through their 401(k) plans each pay period similarly are putting money to work in stock mutual funds or other assets, gradually and at various prices.

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Global stock market arrows going downward.

Yet dollar-cost averaging comes under attack as a “myth” in a study that appears in the current quarterly issue of Morningstar magazine, which caters to professional advisers. The authors claim that you usually can generate higher returns by investing all at once rather than easing in, since the long-term trend for the U.S. stock market has been solidly higher.

“Historically, dollar-cost averaging produces lower long-term returns than does lump-sum investing,” wrote Morningstar researchers Maciej Kowara and Paul Kaplan.

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By Javier Manning

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