4 ms·

> DCA makes mathematical sense anytime you have a long-term bullish thesis (otherwise, "do not invest" is a better strategy), but have a belief that there is a

> DCA makes mathematical sense anytime you have a long-term bullish thesis (otherwise, "do not invest" is a better strategy), but have a belief that there is a short-term noise function... Math citation needed - the noise function you're hypothesizing could just as easily drive the average up as down, unless you have a reason to think it should go down, in which case you're timing the market and there's a better future time to go 100%.

SamBam 4y ago
Of course it could just as easily drive the average up, but the point is that it's a hedge: it's accepting a reduced chance of possible higher returns for the safety of reduced chance of possible lower returns.
- DelaneyM 4y ago
  But it's not a hedge. If you commit to the strategy (buy monthly for 10 months) then you're just choosing an unknown price over a known price. And if you don't commit to the strategy, then you're actively trading and not DCA'ing.
  - kreetx 4y ago
    Isn't it still a hedge? Statistically, you'll get the average price of the stock for the period you DCA. While if you enter at any single moment, you get a somewhat random price. Another thought: if the thesis is that the price will go up, then whatever sum you have and want to invest, should you invest it all now - given that the price is supposed to go up?
    - DelaneyM 4y ago
      If you commit to the strategy in advance, then you're picking an unknown price instead of a current price, and the unknown price is likely higher. A financial hedge is, generally, something which reduces risk or improves on the risk:reward ratio in a mathematically demonstrable way. Generally this means bundling uncorrelated (or anticorrelated) assets. This concept won a Nobel for Econ in 1990(?), and is the foundation of modern portfolio theory. Using "hedge" in a more colloquial way, it can mean "a way to protect yourself from an unexpected poor outcome". But by that definition this also fails, since you're just as vulnerable to outlier events, but the nature of those outlier events is different (and perhaps less intuitive).
      - kreetx 4y ago
        This makes sense, thanks!
renewiltord 4y ago
I believe you're right, but I have always thought DCA was just a measure to transform "fixed amount to savings account" people into "fixed amount to Vanguard" people so that they can access the higher risk that is the S&P500 compared to a savings bank account.

SamBam 4y ago

Of course it could just as easily drive the average up, but the point is that it's a hedge: it's accepting a reduced chance of possible higher returns for the safety of reduced chance of possible lower returns.

DelaneyM 4y ago
But it's not a hedge. If you commit to the strategy (buy monthly for 10 months) then you're just choosing an unknown price over a known price. And if you don't commit to the strategy, then you're actively trading and not DCA'ing.
- kreetx 4y ago
  Isn't it still a hedge? Statistically, you'll get the average price of the stock for the period you DCA. While if you enter at any single moment, you get a somewhat random price. Another thought: if the thesis is that the price will go up, then whatever sum you have and want to invest, should you invest it all now - given that the price is supposed to go up?
  - DelaneyM 4y ago
    If you commit to the strategy in advance, then you're picking an unknown price instead of a current price, and the unknown price is likely higher. A financial hedge is, generally, something which reduces risk or improves on the risk:reward ratio in a mathematically demonstrable way. Generally this means bundling uncorrelated (or anticorrelated) assets. This concept won a Nobel for Econ in 1990(?), and is the foundation of modern portfolio theory. Using "hedge" in a more colloquial way, it can mean "a way to protect yourself from an unexpected poor outcome". But by that definition this also fails, since you're just as vulnerable to outlier events, but the nature of those outlier events is different (and perhaps less intuitive).
    - kreetx 4y ago
      This makes sense, thanks!

renewiltord 4y ago

I believe you're right, but I have always thought DCA was just a measure to transform "fixed amount to savings account" people into "fixed amount to Vanguard" people so that they can access the higher risk that is the S&P500 compared to a savings bank account.