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Notice how it says "Expected Return". The problem is that it is better "on average" to invest it all at once (and doesn't even talk about variance). But an ind
by nightski 6y ago
Notice how it says "Expected Return". The problem is that it is better "on average" to invest it all at once (and doesn't even talk about variance). But an individual is not an average. They will lie somewhere on that spectrum. I'd rather take a small hit to the expected value of my returns in order to reduce risk of being on the wrong side of that average.
- sooheon 6y ago> I'd rather take a small hit to the expected value of my returns in order to reduce risk of being on the wrong side of that average. This is a common fallacy. That is not actually the tradeoff you are making, in fact you are taking a hit to the mean value, and also greatly increasing the chances of being on the wrong side of the average[1]. Dollar cost averaging increases variance and decreases the expected return in proportion to your averaging period. You earn less and have a much lower floor for almost no increase in the ceiling. There are nice visualizations here: https://ofdollarsanddata.com/lump-sum-investing/ https://ofdollarsanddata.com/lump-sum-investing/ [1] at least according to history. Who knows what the future holds.
- deleted 6y ago[deleted]
- nightski 6y agoGood post thanks for sharing. It's true, the market grows more often than it shrinks and I could see how that skews the distribution in favor of lump sum.
- prepend 6y agoYou’re still an individual either way. So it’s still better to use expected return. Maybe you could compare and choose an option with less variability or standard deviation even though the mean return is worse. But these studies don’t compare the size of average losses and gains. I expect that the variance is also better for lump sum.