Hello! I used a similar chart for another question, but I hope to stress different points here. Some disadvantages are:
The Situation where the Markets Rise Over Time
One of the benefits of doing DCA is that you avoid investing all your money during bad times, but rather spreading it out over time. But if you were to invest into the S&P 500 (red line), the index would have increased and gone up over time post crisis. If there was an expectation that the S&P would be on a bull run, then it would be best to invest most of your money at the start, so as to capture the most returns rather than spreading them out over time through DCA.
Not Capitalising on Market Peaks and Troughs
As you can tell from the S&P500's growth, the upward trend is marked by both peaks and troughs. The advantage of DCA is that by spreading your investments proportionally over time, the net effect of peaks and troughs should not be too apparent. But still, if you did not abide by a hard and fast DCA rule, you might have avoided certain peaks and gone in on certain troughs which would boost your returns.
Choosing the Wrong Investments
If you were to decide on using DCA, you would probably need to be quite sure that the investment you will make will experience a net increase over time. Using the STI (blue line) as an example, its returns have been quite low, especially when compared to the S&P500.
Opportunity Cost of Funds
To hold your cash and not invest, means that there is some opportunity cost since they could be making some returns elsewhere.
Transaction Fees
Making more transactions over time could mean more expenses paid which reduces your overall returns.
Hello! I used a similar chart for another question, but I hope to stress different points here. Some disadvantages are:
The Situation where the Markets Rise Over Time
One of the benefits of doing DCA is that you avoid investing all your money during bad times, but rather spreading it out over time. But if you were to invest into the S&P 500 (red line), the index would have increased and gone up over time post crisis. If there was an expectation that the S&P would be on a bull run, then it would be best to invest most of your money at the start, so as to capture the most returns rather than spreading them out over time through DCA.
Not Capitalising on Market Peaks and Troughs
As you can tell from the S&P500's growth, the upward trend is marked by both peaks and troughs. The advantage of DCA is that by spreading your investments proportionally over time, the net effect of peaks and troughs should not be too apparent. But still, if you did not abide by a hard and fast DCA rule, you might have avoided certain peaks and gone in on certain troughs which would boost your returns.
Choosing the Wrong Investments
If you were to decide on using DCA, you would probably need to be quite sure that the investment you will make will experience a net increase over time. Using the STI (blue line) as an example, its returns have been quite low, especially when compared to the S&P500.
Opportunity Cost of Funds
To hold your cash and not invest, means that there is some opportunity cost since they could be making some returns elsewhere.
Transaction Fees
Making more transactions over time could mean more expenses paid which reduces your overall returns.