13 ms·
It 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.
by fierarul 7y ago
It 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).