From bogleheads: '[Dollar Cost Averaging] is the technique of dividing an available investment lump sum into equal parts, and then periodically investing each part.'[1]
Yeah, I'm a big fan of bogleheads, but that definition is just wrong.
There's a big difference between splitting an available sum into equal parts and then periodically investing, and periodically investing money as it becomes regularly available.
Dollar Cost Averaging technically refers to neither. It simply refers to regularly investing a set sum (like $1000) at periodic intervals, as the price goes up and down. It refers to the average cost being less than the average price. As price goes down, that sum buys more shares. As price goes up, that sum buys fewer shares. But it says nothing about where the money comes from.
People then try to apply that definition in two different ways:
1) Using it to regularly invest a periodic income stream, like a portion of your paycheck. Note that in this case the lump sum (the yearly salary) is not entirely available at the beginning. The money is invested as it arrives.
2) Using it to split apart an already-available lump sump into n equal parts, and then buying into the market n times at regular intervals. Note that in this case, a large portion of the lump sum is entirely available at the beginning, and is not invested as it arrives.
Bogleheads is incorrect to phrase DCA as specifically dividing a lump sum into equal parts. It's not the common usage of DCA even on the Bogleheads forums or subreddits. And Bogleheads participants regularly chant that time in market is better than market timing. Splitting a lump sum over time is an example of market timing, since you are judging that later will be better than now. Bogleheads believe market timing is generally bad. They believe that definition #1 is generally good. They believe that definition #2 is generally bad.
So that's where the terminology confusion comes in. People refer to #1 as DCA, and call DCA good, and then misunderstand and also say that #2 is good, when it's (generally) bad.
No, your definition is wrong. DCA does not mean anything more than: "the practice of investing a fixed dollar amount on a regular basis, regardless of the share price" - it is irrelevant where you get the money. https://intelligent.schwab.com/article/dollar-cost-averaging....
There's a big difference between splitting an available sum into equal parts and then periodically investing, and periodically investing money as it becomes regularly available.
Dollar Cost Averaging technically refers to neither. It simply refers to regularly investing a set sum (like $1000) at periodic intervals, as the price goes up and down. It refers to the average cost being less than the average price. As price goes down, that sum buys more shares. As price goes up, that sum buys fewer shares. But it says nothing about where the money comes from.
People then try to apply that definition in two different ways:
1) Using it to regularly invest a periodic income stream, like a portion of your paycheck. Note that in this case the lump sum (the yearly salary) is not entirely available at the beginning. The money is invested as it arrives.
2) Using it to split apart an already-available lump sump into n equal parts, and then buying into the market n times at regular intervals. Note that in this case, a large portion of the lump sum is entirely available at the beginning, and is not invested as it arrives.
Bogleheads is incorrect to phrase DCA as specifically dividing a lump sum into equal parts. It's not the common usage of DCA even on the Bogleheads forums or subreddits. And Bogleheads participants regularly chant that time in market is better than market timing. Splitting a lump sum over time is an example of market timing, since you are judging that later will be better than now. Bogleheads believe market timing is generally bad. They believe that definition #1 is generally good. They believe that definition #2 is generally bad.
So that's where the terminology confusion comes in. People refer to #1 as DCA, and call DCA good, and then misunderstand and also say that #2 is good, when it's (generally) bad.