Dollar Cost Averaging: Why Financial Institutions Hate It

In a recent article over at Good Financial Cents, Jeff Rose wrote about Dollar Cost Averaging (DCA). I strongly recommend this article to any young professional with a 401K, IRA, or any novice who dabbles in mutual funds.

Although I normally defer in all matters of finance to Babeler Jason Morgan, there is one piece of insight I would offer on the topic of DCA.

Financial organizations hate Dollar Cost Averaging. Here is why.

Most brokers and financial advisers are rewarded in a manner similar to commission. In this case they are paid based on the number of trades or transactions. Many, not all, of these experts therefore have little in the way of a stake in the success of your portfolio. They make money based on how active your account is, not how much money you, the customer, makes through your investments.

This leads to a practice known as “churning.” Churning in a nutshell is your financial adviser or stock broker repeatedly recommending you buy and sell shares based on some inside scoop he or she might have received. Soon after, another big story breaks and again, you receive advice to move money out of Fund A and into Fund B. Each time you buy or sell, a small commission is collected by the firm performing the transaction for you.

This practice, performed over time, might make you a few bucks or you might lose some. However, one thing is certain with churning: Your broker gets paid.

As Mr. Rose will tell you in his post, DCA is a slow but steady way to build wealth based on natural fluctuations in the market. A recession, such as the one we are in now, presents a myriad of buying opportunities. Now is the time to load up on cheap shares and let DCA work for you. The best part about it is you don’t need to man the phones, look at ticker symbols, or watch CNBC to do it.

You can expect the financial groups out there to conjure up any and all excuses for you to let them churn your money so they can drop beans in their coffers.  At the same time they will try to convince you DCA is bad using language you can’t understand. But I strongly urge you to listen to Jeff and take advantage of a low stress, hands free, and above all high yield investment strategy.

Image Used in this Post

401K – Perfect Solution image courtesy of Flickr user Mujitra published under the CC license.

~Man Overboard