Is a DRIP or DCAing a better investment strategy?

I have done my research on both a Dividend Reinvestment plan (DRIP) and Dollar Cost Averaging (DCA). Both seem like effective plans and if executed correctly, can produce significant long-term gains. I am fairly young so I am looking for long term and significant gains in my portfolio. Which strategy do you recommend, and what are the pros and cons of each?

Financial Planning, Investing, Asset Allocation
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April 2017

Here are the important considerations: 

DRIP will keep more of your capital invested without typically incurring additional trading costs. In short:

More saving/investing + long time horizon + lower costs = the odds of success tilt in your favor.

DCA is a good way to spread out the risk of poor market timing. Because you're young, poor market timing is less of a risk for you. For a good example of this, consider the buyer of a lump sum of US stocks on October 18, 1987 (the day before Black Monday). This is arguably some of the worst short-term market timing one could have, but looking back about 30 years later, it is really not much of a factor. Your financial plan hinges on the ability to save and invest, and this continued savings should represent some form of DCA.

Note that you should be careful with DCA in that you want to avoid paying huge transaction costs. As an example, if you invested $100/week, but it costs $5/trade, then you only end up with $95 of investments and you're in the hole 5% to start. A 5% hit is enough to likely offset any potential benefit of DCA. So look to employ a suitable commission free fund or work with a platform that doesn't charge trading fees. As your plan grows and you are doing purchases of $1,000, you can be less concerned with a $5 trading fee as it only represents a 0.5% detraction from performance.

 

Good Luck,

Adam Harding, CFP

April 2017
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