IanSalisbury

Reuters

NEW YORK (MarketWatch) — A mutual fund giant challenges an investment technique financial advisers have used for decades, and many professionals are taken aback.

But people with a lump sum of money to invest have good reason to question the conventional wisdom behind dollar-cost averaging.

This suggestion counters the status quo — dollar-cost averaging is just one of those things that’s always been done a certain way. Walk into a broker’s office with an inheritance or a big chunk of your life savings, and chances are you’ll be told there’s no reason to put it into the stock market all at once. Better to average into the market with your dollars, committing a little at a time on a regular schedule. That way there’s less to worry about if stocks get hammered the day after you buy.

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Now mutual fund giant Vanguard Group is trying to change that.

The Malvern, Pa.-based company, whose investment research is closely followed by financial advisers, recently published a paper showing that dollar-cost averaging ends up hurting more investors than it helps. The study appears to have hit a nerve, fast becoming Vanguard’s best-read research item in recent memory, according to the company. Read the Vanguard study.

But persuading investing pros who must face jittery clients may be another thing. The technique has long been one of the basic tools advisers are trained to use. It’s a strategy that many credit with calming nerves and discouraging rash moves.

As a result, many experts, even when they concede the odds aren’t in investors’ favor, aren’t about to adopt new ways. “The math says it shouldn’t work,” said Chapel Hill, N.C. financial adviser Tom Fenn, who nonetheless uses the dollar-cost averaging technique with some clients. “When you get a big chunk of money, the last thing you want to do is buy at the top.”

Better than averaging

Yet almost every investor practices dollar-cost averaging in some form.

Retirement plans such as 401(k)s, for instance, are built around the notion of socking a predetermined amount into the stock market each month. Of course, that’s out of necessity since most workers can’t afford to spare much from each paycheck.

By contrast, Vanguard’s study examines what happens when investors have the luxury of an inheritance or some other large amount of cash. The company chose two figures — $1 million and $20 million — (since institutions and foundations both face the same conundrum as individuals) and ran hundreds of computer simulations to test what would happen if investors trickled money into the market for periods ranging from six months to three years versus investing it all at once.

The computer simulations were based on market returns for rolling 10-year periods starting in February 1926 and ending in December 2011. In addition to the U.S. the researchers looked at the same periods for the U.K. and Australia.

The results: Those who took a year to fully invest lagged investors who went all-in about two-thirds of the time. People who took more time faced even longer odds. Perhaps surprisingly, it didn’t make any difference whether investors picked an aggressive portfolio made up entirely of stocks, a mix of stocks and bonds, or a conservative portfolio made up entirely of bonds.

In dollar terms the discrepancies could be significant: a $1 million portfolio invested all at once in a mix of 60% stocks and 40% bonds turned into $2,450,264 on average, compared to $2,395,824 when the same U.S. securities were bought over the course of a year, a difference of more than $54,000.

Why does the all-in strategy have an edge? “Markets historically have gone up more than they have gone down,” said Vanguard principal Daniel Wallick.

Resistant to change

While investment pros don’t necessarily dispute Vanguard’s findings, many still take them with a grain of salt. Brent Lindell, a financial adviser in Madison, Wis. said one of his newest clients is a young man whose father died recently, passing on a chunk of savings, all in cash. Together, they decided to allocate a third of the money into the market each month for three months.

“I’m not a big fan of market timing,” Lindell said. On the other hand, he worries that U.S. stocks, which have already climbed more than 14% this year despite lackluster economic growth, could be due for a correction.

“When the market is high, I feel more comfortable going slow,” Lindell said. “People are attached to the money they inherit. You wouldn’t want to see that go down.”

Such a view has a long history. Dollar-cost averaging is one of the first precepts financial advisers learn, and that’s not likely to change anytime soon. Harold Evensky, a financial adviser for more than 30 years, said the technique has been a staple as long as he can remember. While he doesn’t necessarily endorse it, he passes it on to students at Texas Tech University, which offers a course of study for aspiring financial advisers.

“We want them to understand the math is not in their favor,” Evensky said. “But we’re financial planners, not money managers. It’s something we may use. But it’s important to understand why you are using it.”

Even if dollar-cost averaging doesn’t usually produce the greatest returns, the worst case for most small investors isn’t failing to put their money into the market all at once, experts say. It’s failing to do simple things like saving enough for retirement or panic selling when the market crashes. It’s a point that can easily get lost.

At Vanguard, for instance, not everyone was in favor of releasing the study, according to Wallick.

“The mathematicians said, ‘Why would we publish this? It’s obvious,” Wallick said. “We we’re surprised by the number of hits it got. It disproved the mathematicians.”