Sometimes, the sacred cows of personal finance lead to disappointment. I'm going to take on three: dollar cost averaging, tax-loss harvesting and the new darling, Roth conversions. The first two have been around long enough now to be considered canon law.

SACRED COW NO. 1

Dollar cost averaging (DCA) is a good way to reduce the risk of investing.

This is partially true. DCA may reduce the risk of getting into an investment at a high price. A client will only know if it helped in hindsight. What's more, investor psychology often causes this technique to fail.

DCA is defined as buying a holding with a fixed-dollar amount at fixed intervals. For example, if a client had $100,000 to invest and wanted to use DCA over a 10-month period, he or she would buy $10,000 of the holding each month.

If the holding's price declines, subsequent purchases will acquire more shares. This is true, but probably not all that helpful to a prudent long-term investor.

The longer clients use DCA, the greater the odds that the averaging will actually work against them. This is because markets rise more often than they fall, and bull markets rise more than bear markets fall. Here's proof: Pick any month between January 1926 and August 2009 as your start date. Fast-forward to one month later, and the U.S. stock market will have risen in 62 out of 100 instances. For 12-month periods, it will have risen 73 out of 100 times. The longer the time frame, the better the odds that the market will be up. DCA adds to the bottom lineonly when the market declines, and by enough to get a lower average price than a lump-sum initial purchase.

The primary reason investors use DCA is that they are worried about a decline. But people who are nervous about the markets rarely view declines as opportunities. The drop merely reinforces their fears. Many people who were planning on getting into the market through DCA refused to buy during last year's decline, undermining the technique at precisely the time it might have been most effective.

Once the DCA period is over, all the money-$100,000 in the example-is exposed to market risk. DCA just delays a client's full exposure. Investing is supposed to be a long-term activity.

Obsessing about the short term is more akin to speculating. Too many advisors use DCA to brush aside client fears or overcome an objection, rather than address those concerns through better coaching or a more conservative portfolio.

SACRED COW NO. 2

Tax-loss harvesting saves clients lots of money.

In reality, most clients will receive only a modest savings on their taxes. When markets drop and tax swaps are made to generate capital losses, clients and shortsighted advisors tend to focus on the losses triggered. Many are disappointed that only $3,000 of those losses can be used against ordinary income, but are heartened by the loss carryforwards for future 1040s. What many overlook is that in the process of harvesting the losses, they have reset their cost basis to a much lower amount. Therefore, they have increased future taxable gains.

Let's ignore dividend and capital gains payouts for simplicity's sake. If a client invests $100,000 in a fund and later sells it for $100,000, there is no gain and no tax. If, in the interim, the fund drops 30%, the client sells for $70,000 and buys another equity fund with the proceeds-and he or she has harvested a loss. With that $30,000 loss, the client can take $3,000 on the current year 1040 and carry forward $27,000. The client also now owns a fund with a basis of $70,000.

If that new fund appreciates to $100,000 and is subsequently sold, the loss available to offset the gain is only $27,000, less $3,000 for each year in the holding period. The remaining gain is taxed at the prevailing capital gains rate.

So if the client sold the fund for $100,000 after five years, he or she has saved tax on $15,000 of ordinary income (in five $3,000 installments), paid no tax on the first $15,000 in gains, but paid tax on the remaining $15,000 long-term capital gains at the rate in effect at that time. Assuming a 40% rate on ordinary income and that today's 15% capital gains rate is in effect for the entire five years, the total net tax savings on that $30,000 loss harvest is $3,750. Taxes saved minus taxes paid = [(5 x $3,000 x 40%) - ($15,000 x 15%)] = $3,750.

After 10 years, all $30,000 would have gone to offset ordinary income, and the full $30,000 would have been a taxable gain, saving a net $7,500 over 10 years. We'd take that, but it's hardly a game changer.