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> That said, it's very hard to time the market, so the best strategy is to put your money in over time. One good way to do this is to take a set amount of money
by shawnz 7y ago
> That said, it's very hard to time the market, so the best strategy is to put your money in over time. One good way to do this is to take a set amount of money from each paycheck and invest it every pay period, regardless of what the market is at. If you have a bunch of money sitting in savings right now, maybe divide it into 52 parts (or 104 or 156 or even 208 depending on your risk tolerance and/or thoughts on how long this market decline will last) and invest that amount each week.
It seems counterintuitive but dollar-cost averaging is really just another way of timing the market. The only way to avoid the downfalls of market timing is to invest everything you want to invest, as soon as you can. Dollar-cost averaging typically loses compared to that strategy.
See: http://valueaveraging.ca/research/Analysis_Dollar_Cost_Averaging.pdf http://valueaveraging.ca/research/Analysis_Dollar_Cost_Avera...
- tarsinge 7y agoIs timing the market always wrong though? I don't feel like I made a bad deal selling one month ago and now re-entering DCA. It was obvious that the US market was not correctly pricing this pandemic. I think there is a middle ground between day trading and never touching anything.
- shawnz 7y agoIt's always wrong if you take luck out of the equation. With DCA, the problem is all the cash you have sitting around NOT invested while in the process of executing the strategy is really just money that you are betting against the market with. For example, maybe there will be a downturn for the next 2 months but what about the 7 months following that? They could all be green for all we know, and all that money would be sitting around being lost to inflation. Also consider this: on average, missing just the best 10 trading days of each year would cut your returns in half, historically. We have already had several huge single-day rallies even in this downturn, and people who divested for that period may have made their losses even worse by doing that.
- jcomis 7y agoBasically you got lucky this time. Generally it's not good advice.
- fierarul 7y agoIt is counterintuitive since the default explanation about DCA is that one will ride highs and lows for a good average return. I'll have to read that paper.
- shawnz 7y ago> that one will ride highs and lows for a good average return. That's what happens if you invest lump sum -- you get the average, which is usually good because of the upwards trend of the market (due to the market risk premium). When you DCA, you need to think about all the money that's NOT invested during that time, being lost to inflation. Essentially you are betting against the market with that fraction of your money over the period you do the DCA. But it's not obvious that that's whats happening because when you are in the process of doing DCA, it "feels" like it's all invested to some degree. If you want something that's lower risk than the stock market, then you can just go with an asset allocation that's less than 100% equities and just stick with it. But there is no reason to change your asset allocation over time if your financial situation is not changing (assuming you can't time the market), yet that is basically what DCA does.
- fierarul 7y agoI find amazing that Vanguard also suggests this: https://investor.vanguard.com/investing/online-trading/invest-lump-sum https://investor.vanguard.com/investing/online-trading/inves... > When you DCA, you need to think about all the money that's NOT invested during that time, being lost to inflation. I see. So DCA makes sense only if you don't actually have that money available (eg. as a way of investing part of each future paycheck).