Somewhere In Between: The Behavior ofollar-Cost-Averaging Fund Investors
Date Issued
2008
Date
2008
Author(s)
Chao, Chia-Yun
Abstract
How do you deal with your salary after expenditure? Put it in the bank? Buy stock? Or you may put it somewhere in between. Combining the advantages of savings and lump-sum investing, dollar-cost averaging has been one of the mostopular investing strategies nowadays. Like bank depositors, dollar-cost averaging investors don’t have to make sequential investment decision; however, they can havelmost as much return as lump sum investors.hrough data set provided by large brokerage house with 42,387 accounts from 2000 to 2006, we find: First, female investors as well as investors with younger age, less education and lower household income are more likely to use dollar-cost averaging as an investment strategy. Second, from standard finance perspective, we find that the average annual return of dollar-cost avenging transaction is 10.2% while that of lump-sum investment is 12.02%, but the standard deviation of return from dollar-cost averaging is far more less than that of lump-sum investing. Finally, fromehavioral finance perspective, we find that dollar-cost averaging investors have been enjoying higher utility than lump-sum investors. Besides, they exhibit less dispositionffect. They can endure more loss than lump-sum investors, but they still tend to stop investing when they lose money. It shows that dollar-cost averaging cannot really helpnvestors control themselves from selling when losing.
Subjects
behavioral finance
dollar-cost averaging
prospect theory
aversion to regret
self control
Type
thesis
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