3 ms·

There are lots of interesting things to consider here. Thanks for putting this together, it set me thinking. The analysis doesn't consider investment over time

by marvin 18y ago

There are lots of interesting things to consider here. Thanks for putting this together, it set me thinking. The analysis doesn't consider investment over time - as far as I can tell, this graph shows the probability distribution of returns on a one-time investment after a period of years. The goal of investing long-term is to dampen the effect of investing at a (in retrospect) very good or very bad time. (In addition, of course, you need to put your money somewhere to get returns at all). Random oscillations can be dampened further by investing at regular intervals, disregarding what the stock price is at the moment: for instance, investing a smaller amount every month for five years (or even every month, period). It would be interesting to see how the probabilities of such an investment scheme fares against a savings account. You could even make two probability distributions: one for stock market returns and one for savings account returns, considering taxes where they apply. (In my part of the world, income from savings accounts is taxed annually while returns on stock is only taxed when the gains are realized, which affects returns over time substantially). Inflation affects all investments equally, and could be disregarded. Now that I think of it, maybe I should do this myself. This is exactly the kind of investment scheme I am betting on for the next 20 years, so it seems a bit irresponsible not to do this kind of thing beforehand.

tomsaffell 18y ago
Good thoughts. As you say, this is for a 'lump sum' investment, not investment over time, which has the benefit of dollar-cost-averaging. As I mentioned in my post, I may look at that next, probably in v3. The tax is is good point too, but I'll leave that off the table for the next version as people's tax situations vary, and it gets complex - maybe v5..
gamble 18y ago
Investing a lump sum by spreading it out over a period of time ('dollar cost averaging') has been shown to produce lower returns than making one large initial investment. Most experts regard it as a marketing gimmick used to ease nervous customers into investments.
- comatose_kid 18y ago
  Really? That is a surprising outcome, and would seem to be dependent on when that large initial investment was made.
  - pfedor 18y ago
    I'm pretty sure he meant "on average." And it's hardly surprising, since the market on average goes up. Dollar cost averaging decreases your expected value while also decreasing the standard deviation (risk.) I don't know the result gamble was referring to, but I'm guessing he meant that if you wanted to decrease your risk, then the better way to do so is by adjusting your stock/bond ratio. For completeness I'll mention that there's also a strategy called "value cost averaging", which gives better returns than dollar cost averaging but is less straightforward to implement, you need to keep a spreadsheet and do some calculations--the basic idea is that instead of investing a fixed amount of dollars every period of time, you invest the amount needed to keep the value of your portfolio growing at a certain rate (i.e., you buy more when the stocks go down and less when they go up.)
- nostrademons 18y ago
  That assumes that you have all the money in the beginning, correct? Makes perfect sense in that case - the market goes up on average, so if you invest early on, you get a better price. But most people don't have a large pile of money sitting around, and earn it over time. AFAICT, dollar-cost-averaging gives you a better return than the alternatives of buying a certain number of shares monthly, buying the best performing stocks, or holding all the cash and investing it when you think it's a good time to invest.
  - gamble 18y ago
    Yes, the term 'dollar-cost averaging' tends to be overloaded. Strictly speaking, it refers to a strategy where you start with a lump sum and invest it in chunks over a period of time, rather than at once. Some people have extended the concept to periodic investments, like you might make in a 401k. In that case, there's really no reason to sit on your money rather than investing it as you go.

by marvin 18y ago

tomsaffell 18y ago

Good thoughts. As you say, this is for a 'lump sum' investment, not investment over time, which has the benefit of dollar-cost-averaging. As I mentioned in my post, I may look at that next, probably in v3. The tax is is good point too, but I'll leave that off the table for the next version as people's tax situations vary, and it gets complex - maybe v5..

gamble 18y ago

Investing a lump sum by spreading it out over a period of time ('dollar cost averaging') has been shown to produce lower returns than making one large initial investment. Most experts regard it as a marketing gimmick used to ease nervous customers into investments.

comatose_kid 18y ago
Really? That is a surprising outcome, and would seem to be dependent on when that large initial investment was made.
- pfedor 18y ago
  I'm pretty sure he meant "on average." And it's hardly surprising, since the market on average goes up. Dollar cost averaging decreases your expected value while also decreasing the standard deviation (risk.) I don't know the result gamble was referring to, but I'm guessing he meant that if you wanted to decrease your risk, then the better way to do so is by adjusting your stock/bond ratio. For completeness I'll mention that there's also a strategy called "value cost averaging", which gives better returns than dollar cost averaging but is less straightforward to implement, you need to keep a spreadsheet and do some calculations--the basic idea is that instead of investing a fixed amount of dollars every period of time, you invest the amount needed to keep the value of your portfolio growing at a certain rate (i.e., you buy more when the stocks go down and less when they go up.)
nostrademons 18y ago
That assumes that you have all the money in the beginning, correct? Makes perfect sense in that case - the market goes up on average, so if you invest early on, you get a better price. But most people don't have a large pile of money sitting around, and earn it over time. AFAICT, dollar-cost-averaging gives you a better return than the alternatives of buying a certain number of shares monthly, buying the best performing stocks, or holding all the cash and investing it when you think it's a good time to invest.
- gamble 18y ago
  Yes, the term 'dollar-cost averaging' tends to be overloaded. Strictly speaking, it refers to a strategy where you start with a lump sum and invest it in chunks over a period of time, rather than at once. Some people have extended the concept to periodic investments, like you might make in a 401k. In that case, there's really no reason to sit on your money rather than investing it as you go.