When to Invest in China? Dollar Cost Averaging vs. Lump Sum Investing


As mentioned on more than one occasion, ChinaFund.com has one mission and one mission only: making sure our clients make the best possible investment decisions with respect to Chinese assets. When the time is right to buy, we recommend just that. The same way, when market conditions indicate that selling is the superior strategy, bringing that reality to the attention of our clients represents the professional approach.

In other words, we are not here to be cheerleaders.

Yes, the ChinaFund.com team has 12+ years of hands-on experience in China and yes, we do believe the world’s most amazing secular mega-trend revolves around China. But we do not let our experience and long-term outlook cloud our short to mid-term judgement. To put it differently, we are anything but perma-bulls who believe only sunshine and rainbows await.

A peculiar aspect we have noticed is that certain dimensions of the investment world are more prone to “cheerleader-type” behavior than others, for example precious metals and cryptocurrencies. More prone to investment behavior which revolves around falling in love with the asset class you are investing in and refusing to even accept the possibilities that prices could go down short-term or that a mid-term bear market might be close.

Among such crowds, dollar cost averaging tends to be a popular strategy.

“Gurus” love pitching the idea that all you have to do is accumulate gradually, without worrying about timing. Buy a little bit this month, then a bit more next month. Rinse and repeat. And, indeed, it is not difficult to understand why investors (especially beginners) find this approach appealing. After all, it eliminates a fair bit of stress from the equation and furthermore, you as an investor feel less burdened by the decision.

In contrast, “timing the market” via lump sum investing seems dangerous… reckless even.

Even professional wealth managers pitch dollar cost averaging to some of their clients, so it must be the superior option, right?

As with most decisions in life (even outside the world of finance/economics), it is our opinion that the scientific method needs to prevail. In our case, when deciding between dollar cost averaging and lump sum investing, it is vital to conduct robust due diligence and find out “what science says” about this topic rather than succumbing to emotional impulses.

And science tends to favor lump sum investing… strongly.

From papers written all the way back in the seventies by professionals such as George M. Constantinides (who, in 1979, commented on the sub-optimality of dollar cost averaging as an investment policy in The Journal of Financial and Quantitative Analysis) to the 21st century work of Gerstein, Fisher & Associates… the more you brush up on your reading with respect to the two options, the more obvious it becomes that the “evidence” behind dollar cost averaging is quite thin.

Is it a lie that some wealth managers recommend it?

No, not quite. But to get the full picture and context, we need to also ask ourselves why they do it.

Is it because dollar cost averaging is the scientifically superior approach?

Definitely not. Some wealth management experts simply end up recommending this option because it is occasionally pretty much the only suggestion that convinces their clients to actually invest as opposed to keeping money under the proverbial mattress. At the end of the day, wealth managers don’t work with robots, they work with human beings and the key to being good in this field is frequently represented just as much by knowing how to convince your clients to take action as by knowing which specific investments to recommend.

In a nutshell: while dollar cost averaging your way to a diversified portfolio is definitely better than simply keeping money in the bank indefinitely and watching your purchasing power be eroded by inflation, it tends to be inferior to lump sum investing.

For this reason, when it comes to the “when” dimension of investing in China, the ChinaFund.com team recommends putting in the work it takes to follow the market properly so as to embrace lump sum investing as a strategy. Rather than blindly buying in via DCA, we strongly recommend letting the market tell you when the risk to reward ratio justifies a purchase. Should you need assistance with just that, our experts are at your disposal: simply visit the Consulting section to see what we can do for you and when you are ready to set things in motion, visit our Contact page and get in touch.

As tempting as it may be to “pitch” the idea that there is a hassle-free approach to investing in China which can stand the test of time, we know dollar cost averaging is the sub-optimal option and as such, prefer to go with what has been scientifically proven to outperform: lump sum investing.

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