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Research shows that timing the market is hard. The more times you try to do it, the more likely you are to fail. Dollar cost averaging saves you from having to

by c22 4y ago

Research shows that timing the market is hard. The more times you try to do it, the more likely you are to fail. Dollar cost averaging saves you from having to express super human timing on all of your trades.

DelaneyM 4y ago
Dollar-cost averaging is still timing the market, if you have the full amount up front. You're betting that your future weighted average is less than the current price, that's timing.
- Nursie 4y ago
  You're trying to take short-term volatility out of the equation. If I think the stock will go up over the course of years but have really no idea what it's going to do over the course of hours/days/weeks, then approximating a buy-in at the average price over a longer period would seem to be a de-risking approach.
  - DelaneyM 4y ago
    It may well seem to be de-risking, but mathematically it doesn't.
    - Nursie 4y ago
      Can you point me to some of this mathematical proof? Because I'm seeing advice all over the net that it can help iron out short-term volatility. Your point that "If you think it will go down over several months, you shouldn't be buying in" is fine, but I'm not sure it's equivalent to "I don't know what it's going to do anytime soon I'm buying this for long-term prospects". Imagine a stock with a sinusoidal price fluctuation at a frequency of just under a week, but which you expect to rise significantly over a 5 year period. Investing in that weekly over 5 weeks will net you a more locally average price than going all in today, particularly if you don't have good information about that sine pattern. Going all-in right now might net you a low price, but you may also be buying at a local maximum. (Think of discrete waveform sampling)
      - kareemsabri 4y ago
        I believe your intuition is correct, and it just straightforwardly does help iron out short term volatility. What it de-risks is the likelihood the bottom arrives some time in the next year, at a point lower than today, and that you could have achieved a significantly lower average entry price by waiting. The risk it exposes you to is that it's already the bottom, and you're going to keep buying in on the recovery. So if you're long term optimistic but short term bearish, but lacking high confidence in your ability to call the bottom, DCA makes sense imho. I don't know what the conjecture is that would make it not de-risking that, or what a proof would be, maybe GP will clarify. It should be noted that many analyses of DCA versus lump sum are around the S&P 500 overall. In the case of highly volatile growth stocks or just single stock investing like Fred is discussing in the article, market timing risk is more acute, since the drawdowns are more severe (it is quite rare for the S&P 500 to drop 70-80%). Shameless plus, I am the owner of a DCA investing app + a simulator tool to backtest DCA with different stocks, over different time periods https://simulator.tryshare.app/ https://simulator.tryshare.app/
      - patrick451 4y ago
        I've seen this advice all over too, but it's never accompanied by anything approximating a mathematical proof. IMO, the burden of proof is on showing DCA works, not the other way around. In any case, the problem with your analogy is that if you have no information about that sin wave, you're equally likely to be investing at a local minimum.
        Nursie 4y ago
        > you're equally likely to be investing at a local minimum. If you invest at a few different times, whether fixed interval or random, is this not increasing the probability of approach an average value over the period you're investing? I'm not asserting it's a good idea, I'm not using it as a strategy myself (or in fact making investment choices myself at all really), I'm just interested from the technical perspective.
        DelaneyM 4y ago

by c22 4y ago

DelaneyM 4y ago

Dollar-cost averaging is still timing the market, if you have the full amount up front. You're betting that your future weighted average is less than the current price, that's timing.

Nursie 4y ago
You're trying to take short-term volatility out of the equation. If I think the stock will go up over the course of years but have really no idea what it's going to do over the course of hours/days/weeks, then approximating a buy-in at the average price over a longer period would seem to be a de-risking approach.
- DelaneyM 4y ago
  It may well seem to be de-risking, but mathematically it doesn't.
  - Nursie 4y ago
    Can you point me to some of this mathematical proof? Because I'm seeing advice all over the net that it can help iron out short-term volatility. Your point that "If you think it will go down over several months, you shouldn't be buying in" is fine, but I'm not sure it's equivalent to "I don't know what it's going to do anytime soon I'm buying this for long-term prospects". Imagine a stock with a sinusoidal price fluctuation at a frequency of just under a week, but which you expect to rise significantly over a 5 year period. Investing in that weekly over 5 weeks will net you a more locally average price than going all in today, particularly if you don't have good information about that sine pattern. Going all-in right now might net you a low price, but you may also be buying at a local maximum. (Think of discrete waveform sampling)
    - kareemsabri 4y ago
      I believe your intuition is correct, and it just straightforwardly does help iron out short term volatility. What it de-risks is the likelihood the bottom arrives some time in the next year, at a point lower than today, and that you could have achieved a significantly lower average entry price by waiting. The risk it exposes you to is that it's already the bottom, and you're going to keep buying in on the recovery. So if you're long term optimistic but short term bearish, but lacking high confidence in your ability to call the bottom, DCA makes sense imho. I don't know what the conjecture is that would make it not de-risking that, or what a proof would be, maybe GP will clarify. It should be noted that many analyses of DCA versus lump sum are around the S&P 500 overall. In the case of highly volatile growth stocks or just single stock investing like Fred is discussing in the article, market timing risk is more acute, since the drawdowns are more severe (it is quite rare for the S&P 500 to drop 70-80%). Shameless plus, I am the owner of a DCA investing app + a simulator tool to backtest DCA with different stocks, over different time periods https://simulator.tryshare.app/ https://simulator.tryshare.app/
    - patrick451 4y ago
      I've seen this advice all over too, but it's never accompanied by anything approximating a mathematical proof. IMO, the burden of proof is on showing DCA works, not the other way around. In any case, the problem with your analogy is that if you have no information about that sin wave, you're equally likely to be investing at a local minimum.
      - Nursie 4y ago
        > you're equally likely to be investing at a local minimum. If you invest at a few different times, whether fixed interval or random, is this not increasing the probability of approach an average value over the period you're investing? I'm not asserting it's a good idea, I'm not using it as a strategy myself (or in fact making investment choices myself at all really), I'm just interested from the technical perspective.
        DelaneyM 4y ago