7 ms·

Debunking the Myth of Dollar Cost Averaging

41 points by alexmolas 3y ago

fullshark 3y ago
Doesn't this just follow from the fact that more days are green than red and the sp500 has gone up over the time period of interest? Time in market beats timing the market so to speak? I do think a lot of advice is about reducing volatility because amateur investors freak out over sudden negative drops and then make mistakes out of panic. The advice is not about maximizing returns.
- super256 3y ago
  > I do think a lot of advice is about reducing volatility because amateur investors freak out over sudden negative drops and then make mistakes out of panic I agree with this, but personally, I don't like DCA because you aren't managing risk. I found that it's way easier to manage fear and greed in markets if you have proper risk management, and most people simply don't want to learn this skill for whatever reason. "Every battle is won or lost before it is ever fought", so you should have a plan where to enter and exit a trade. > Time in market beats timing the market so to speak? This works for past performance of S&P500, but if you look at other indices like Nikkei225 (Japan's lost decades of economic stagnation) this strategy doesn't work too well.
timcavel 3y ago
[dead]
partiallypro 3y ago
People (small investors) generally dollar cost average because they don't have the money to buy it in a lumpsum, so I don't really see the point here. You also do it because you're more likely to do it vs a lumpsum, it feels less painful. That is one of the reasons the advice exists. Not everyone has spare cash laying around.
- function_seven 3y ago
  Yup. And with DCA, a skittish investor has something they can point to when buying stocks in all market conditions. Instead of “oh, I should wait for the dip” you can view your automatic purchases as “buying fewer shares because they’re expensive”. Instead of “oh, the market’s crashing. I should wait for the bottom,” you can think, “I’ll just be buying more shares the cheaper they become” It’s not a strategy per se, but more of a reasoning to stay the course and make your static monthly contribution.
- refurb 3y ago
  Plenty of people come into windfalls, say from selling a home, selling company stock, a inheritance, a gift, etc. Clearly investing $400 of saving each month is not the person this article is talking about.
  - partiallypro 3y ago
    I still don't see the point of the article. If a stock goes up in the long run obviously the sooner you invest the better your return will be. DCA exists for several reasons. For instance, big institutional investor might do it because it reduces volatility of making large purchases that could affect the price in the short run which undercuts their investment & purchase price. Small investors do it because they don't have the money to do lumpsums. People that get windfalls don't generally park the cash in a savings account, they'll put some in a CD, money market, or bonds as they decide what to invest in otherwise. The money isn't sitting around doing nothing. The premise of this relies on an idea that the money is doing nothing otherwise (though it's available). That is not the case in most circumstances, not just because the money is usually in a safer investment, but because most people don't have spare uninvested money laying around, as I said.
SmooL 3y ago
Doesn't this completely miss the point? DCA is about reducing volatility, not maximizing return. Your expected value is higher without DCA, but it's not about the expected value - it's about tightening the stddev of possible outcomes. "A bird in the hand is worth two in the bush".
- wrs 3y ago
  It doesn’t exactly miss the point, but it does kind of blow past it and quickly dismiss it. There is a graph showing exactly this, and he even says “reduction of the risk comes at a price” — as it always does.
- toast0 3y ago
  DCA is really about managing behavior rather than volatility or return. It's hard for many people to put a lump sum in the market, even if they agree it's the right thing to do. It's behaviorally easier to put X% in today and the rest on a schedule than to make the decision to put the lump sum in today. It's better to start the process than to waffle on if today is the day or not.
lordentropy 3y ago
If stock market always goes up in the long run, I bet you can mathematically prove that just investing all your money as soon as you have it beats any dollar cost averaging where you just invest a small amount in frequent intervals (and keep some of your money in cash).
- StopTheWorld 3y ago
  > If stock market always goes up in the long run The DJIA was 381.17 on September 3rd, 1929. It then went down and did not return to that level until over 25 years later - November 23rd, 1954. Factoring in inflation it would be losing money over a period of 25 years. The DJIA was 1,051.70 on January 11th, 1973. It then went down during a period of enormous inflation, until it hit that level again on November 3rd, 1982. We can look at the dot-com collapse in 2000, followed by the sub-prime collapse in 2008, which really roiled the economy, followed by the more recent period of stocks sinking last summer, inflation, FAANG layoffs, relatively tight VC money etc. As Keynes said, in the long run we're all dead. You can put your money in the market and be underwater for over 9 years, or even over 25 years. Of course, on the other hand you can be completely out and miss out during one of the go-go periods.
  - throw0101b 3y ago
    > You can put your money in the market and be underwater for over 9 years, or even over 25 years. And in many cases, if you didn't cash out and crystallize your losses, you could still be fine: * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market... Also why diversification and asset allocation is important: having 20% in bonds in addition to being in the S&P 500 during the 2000s (post-dotcom, post-GFC) still allowed you to have an positive return: * https://www.forbes.com/sites/advisor/2010/09/13/its-not-really-a-lost-decade/ https://www.forbes.com/sites/advisor/2010/09/13/its-not-real... Some Bogleheads did a similar analysis for 1980s Japan bubble: having some bonds and foreign (non-JP) stocks, limiting your JP equities to (say) <60%, and rebalancing ~annually gave you really good numbers, even after the crash.
  - upon_drumhead 3y ago
AlbertCory 3y ago
Debunking "debunking" articles. Wow, he talked to some "experts", ran a computer analysis, and now he's on the front page of Hacker News. > The main conclusion of this post is then [sic] invest all you have as soon as you can that's exactly the point of dollar cost averaging: if you're able to save, say, $250 a month, every month you buy $250 worth of something. Especially now that commissions are zero or nearly zero, it's a good thing to do.
- evancox100 3y ago
  The post defines that as “Systematic Investing”, while DCA is defined as taking a larger amount (e.g. a windfall of $10k) and deploying it over time instead of all at once. You can have your own definitions but this is clearly explained in the post.
  - notimetorelax 3y ago
    There’s time value of money. For the DCA and LS the post compares investing money to accrue rate of return vs just keeping most in cash. Of course, given that stocks in average go up, it’s best to invest as soon as possible.
  - AlbertCory 3y ago
    The title is clickbait, so you're wrong. DCA is what regular employees do with their 401K, so the title implies that they're doing investing wrong. They're not. The "LS" hypothesis corresponds to virtually no behavior in the real world.
  - AlbertCory 3y ago
    "dollar cost averaging" is not subject to redefining. It's already got a long-established definition. The author is free to add new qualifiers to the word, but putting your regular salary deductions into a stock or index, e.g. your 401K, is DCA. https://www.investopedia.com/terms/d/dollarcostaveraging.asp https://www.investopedia.com/terms/d/dollarcostaveraging.asp https://www.forbes.com/advisor/investing/dollar-cost-averaging/ https://www.forbes.com/advisor/investing/dollar-cost-averagi...
317070 3y ago
Yes, lump sum maximises expected returns, but you typically don't want to just maximise expected returns. Volatility matters. If I give you this once in a lifetime trade: 100k for a 1 in a 1000 chance to win 500M, would you take it? There are very few people who would, even though it has 400k of expected returns, a whopping 400%. Most of us simply don't make enough money in a life to take that trade enough times to cope with its volatility. Elon Musk should probably take that trade though.
- lordentropy 3y ago
  If you have a long time horizon and invest in a broad-based index fund, why do you even care about short term volatility? If you need to withdraw money within the next few years, then yes volatility matters. But in that case, you might be better off not investing in stocks and go with less risky stuff.
  - steveBK123 3y ago
    Everyone has a different definitions of short & long term, and the resulting volatility appetite. Volatility is also a lot easier to read and pontificate about than to experience in real time. What people do during draw downs is often emotion driven and for people who have never been through it, it's hard to infer from textbooks. And there have been periods where the market has been down for near a decade. If you put a lump sum at the 2000 peak, you wouldn't be back to even until the 2007 peak.. at which point it promptly crashed and didn't make back to even until 2013. (+/- a few years when you factor in dividends). Similar for 1973/1980/1982. Slow grind downs like the GFC are harder to experience as you watch slow losses pile up day after day for near 18 months.
  - brnaftr361 3y ago
    I dunno MS took a really long time to recover it's peak. Even if you didn't buy the top it stayed flat for a very long time. Not that it happens in every instance, but at some point in managing it you have to consider opportunity cost, call a loser a loser, and pull out. 15 years to break even and that's without taking inflation into account.
cube2222 3y ago
I think it's well-known that DCA reduces risk, and not maximizes gain. With DCA you won't put all your money in one day before a crash.
- evancox100 3y ago
  The crash could still happen one day after you put the last dollar in. If you can’t handle such a crash, you need to invest less in stock all the time, not just for a few weeks/months after receiving a windfall.
  - steveBK123 3y ago
    Sure let's say it happens the day after you put your last dollar in, but some of those dollars previously put in are up 1/5/10/20% depending on DCA pace. Therefore THOSE dollars don't experience the same loss as the last dollar which has not appreciated. Of course you are measuring that against the fact that the market generally goes up, so any dollars held outside the market are missing gains over time.
erentz 3y ago
This depends on your circumstance and its important to be a bit more cautious if you received a large lump sum (e.g. from a disability settlement) that you expect to need or live off. Yes the average person randomly assigned a lump sum on a random day will do much better if they deploy it immediately. But the tail person who gets the bad roll of the dice and receives it on a bad day will do much worse and may not have the money they needed to rely on. You're not the average person, you're just one person from the population, and you don't know if you'll be the one with the bad roll of the dice or not. That's why people DCA. If receiving a large lump sum like this you need to live off, either DCA over 12-24 months, or make sure you have some really good tactical allocation system that moves you to safety in the first few years.
Thorrez 3y ago
Instead of comparing them based on the average expected value and the variance, and trying to evaluate the trade-off between them in your head, how about comparing them based on the median case, the 40th percentile case, the 30th percentile case. That allows returns and variance to be combined into one number, allowing more intuitive comparison and evaluation of the trade-off.
eldfgl 3y ago
Yeah if you don't need personal liquidity, throw it all at the market! Haha
Thorrez 3y ago
This doesn't seem too take into account that uninvested money could earn interest in a high yield savings account, or government bonds.
65 3y ago
If you make a salary from your job, dollar cost averaging makes more sense than saving up your salary and then lump sum investing it at some point in time. Randomly getting a huge lump sum of money would only happen very rarely. In reality, investing your paycheck each week is a much better method of investing than either trying to play the market or saving up in a low yield savings account. This is horrible advice for the vast majority of investors who are getting paychecks each week. Just because it's on the front page of Hacker News does not mean it's true.
- embwbam 3y ago
  This usually comes up because people procrastinate investing and end up with a large amount of money sitting idle. They have anxiety about how to put it into the markets. Saving with each paycheck isn’t dollar cost averaging. It’s lump sum. DCA would be something like putting 1/4 of your total savings every week. Anyway, in my experience this situation comes up a lot due to the above
  - AlbertCory 3y ago
    How is putting 10% of your salary each paycheck NOT dollar-cost averaging? Let's assume you're just buying a broad-based index fund. The same amount of money buys fewer shares when the index is up, and more when it's down. That is the very definition of DCA.
- rflrob 3y ago
  The introduction (but nowhere in the rest of the article) makes a distinction between Dollar Cost Averaging (where you spread out a windfall over some period of time) and systematic investing (SI; where you regularly invest income as you get it). I suspect the author would not advocate for saving up your weekly paycheck and investing it as a large chunk. > The difference between DCA and SI is that in DCA you have all the money available since the beginning, but in SI you have to wait until the next month to have access to the quantity to be invested.
- alexmolas 3y ago
  This is why in the post I differentiate between dollar cost averaging and systematic investment. Investing a part of your salary every month is basically the same as lump sum. I don't defend in any moment to save money during the year and invest it after some months. Actually, my advice is to invest the most you can as soon as you can. And in many cases this means to invest a fixed amount of money every month.
MrPatan 3y ago
DCA is about ease of implementation and regret minimisation, not ev optimisation.
ljsb 3y ago
Dollar Cost Averaging a lump sum might reduce your risk while you're averaging in, but why weren't you happy with the risk/return profile in the first place? And are you happy with increasingly higher risk/return as you commit more of your lump sum? Isn't it better to pick a portfolio with a risk profile you're happy with in the first place, then commit your entire lump sum?
- cj 3y ago
  > Dollar Cost Averaging a lump sum might reduce your risk while you're averaging in, but why weren't you happy with the risk/return profile in the first place? If I suddenly inherited $1m in cash and I planned out my desired portfolio allocation, I would want to enter into it over the course of at least a couple months because: 1) Interest rates are so high, you'd still be doing well earning 5% interest with the money parked in money market / bond / treasury ETFs. This significantly reduces the opportunity cost of waiting to invest the money or entering into a position slowly over time. 2) Markets fluctuate on a day to day basis often in response to things like fed meetings, jobs reports, earnings announcements, etc. You can average out the volatility by entering into the position over a few months (which, again, due to high interest on extremely low-risk cash/treasuries/bonds returning ~5% currently, the opportunity cost is minimal).
hansvm 3y ago
Stated another way, the author believes (probably rightly so) that stocks outperform cash equivalents, and they're pointing out that the "intuition" behind DCA doesn't actually add up when you tally all the contributions. DCA is just a way to choose your security/cash split at different points in time though. Their relative performance at different points in time greatly impacts the results. Any time you have additional (probabilistic) information to bear on the problem, DCA can start to look a lot more attractive. For example, if you expect that in some time horizon there will be a dip of unknown magnitude and unknown bottom timing, then DCA outperforms many alternatives including buying up-front. Anywho, just take care to blend what you know about the market (probably approximately nothing) with what your goals are (0% chance of hitting $0 vs a low chance of hitting $10M+ vs highest average yield no matter what vs highest yield predicated on being able to afford an upcoming purchase vs whatever else floats your boat). The right strategy for somebody else is not necessarily the right strategy for you.
nimos 3y ago
Five years is a fairly long time to DCA and you would presumably park the rest of the money in a tbill ladder or even something slightly riskier. Not taking that into account is pretty significant considering the time period in question. ex 3 month tbills were yielding 12% at the start of the period. There is a fairly significant body of work around this idea by professionals in the field and a pretty well established set of trade offs between lump sum and DCA. This isn't really a "debunking" so much as it's a fairly naïve and uncharitable comparison of DCA vs LS.
throw0101b 3y ago
If you already have a pile of money, then lump sum investing is better. But sitting in cash until you have a pile of money, is worse: * https://ofdollarsanddata.com/dollar-cost-averaging-vs-lump-sum/ https://ofdollarsanddata.com/dollar-cost-averaging-vs-lump-s... Most of us do not have a pile of cash though, so it's better to get in the market a little every month: * https://ofdollarsanddata.com/just-keep-buying/ https://ofdollarsanddata.com/just-keep-buying/ * https://www.goodreads.com/en/book/show/59046778 https://www.goodreads.com/en/book/show/59046778 And waiting to buy the dip doesn't work any better: * https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
Havoc 3y ago
People react poorly to being told as much though. And if it gets people into a saving monthly then perhaps it is not the worst of things

41 points by alexmolas 3y ago

Doesn't this just follow from the fact that more days are green than red and the sp500 has gone up over the time period of interest? Time in market beats timing the market so to speak? I do think a lot of advice is about reducing volatility because amateur investors freak out over sudden negative drops and then make mistakes out of panic. The advice is not about maximizing returns.

super256 3y ago
> I do think a lot of advice is about reducing volatility because amateur investors freak out over sudden negative drops and then make mistakes out of panic I agree with this, but personally, I don't like DCA because you aren't managing risk. I found that it's way easier to manage fear and greed in markets if you have proper risk management, and most people simply don't want to learn this skill for whatever reason. "Every battle is won or lost before it is ever fought", so you should have a plan where to enter and exit a trade. > Time in market beats timing the market so to speak? This works for past performance of S&P500, but if you look at other indices like Nikkei225 (Japan's lost decades of economic stagnation) this strategy doesn't work too well.

timcavel 3y ago

[dead]

partiallypro 3y ago

People (small investors) generally dollar cost average because they don't have the money to buy it in a lumpsum, so I don't really see the point here. You also do it because you're more likely to do it vs a lumpsum, it feels less painful. That is one of the reasons the advice exists. Not everyone has spare cash laying around.

function_seven 3y ago
Yup. And with DCA, a skittish investor has something they can point to when buying stocks in all market conditions. Instead of “oh, I should wait for the dip” you can view your automatic purchases as “buying fewer shares because they’re expensive”. Instead of “oh, the market’s crashing. I should wait for the bottom,” you can think, “I’ll just be buying more shares the cheaper they become” It’s not a strategy per se, but more of a reasoning to stay the course and make your static monthly contribution.
refurb 3y ago
Plenty of people come into windfalls, say from selling a home, selling company stock, a inheritance, a gift, etc. Clearly investing $400 of saving each month is not the person this article is talking about.
- partiallypro 3y ago
  I still don't see the point of the article. If a stock goes up in the long run obviously the sooner you invest the better your return will be. DCA exists for several reasons. For instance, big institutional investor might do it because it reduces volatility of making large purchases that could affect the price in the short run which undercuts their investment & purchase price. Small investors do it because they don't have the money to do lumpsums. People that get windfalls don't generally park the cash in a savings account, they'll put some in a CD, money market, or bonds as they decide what to invest in otherwise. The money isn't sitting around doing nothing. The premise of this relies on an idea that the money is doing nothing otherwise (though it's available). That is not the case in most circumstances, not just because the money is usually in a safer investment, but because most people don't have spare uninvested money laying around, as I said.

SmooL 3y ago

Doesn't this completely miss the point? DCA is about reducing volatility, not maximizing return. Your expected value is higher without DCA, but it's not about the expected value - it's about tightening the stddev of possible outcomes. "A bird in the hand is worth two in the bush".

wrs 3y ago
It doesn’t exactly miss the point, but it does kind of blow past it and quickly dismiss it. There is a graph showing exactly this, and he even says “reduction of the risk comes at a price” — as it always does.
toast0 3y ago
DCA is really about managing behavior rather than volatility or return. It's hard for many people to put a lump sum in the market, even if they agree it's the right thing to do. It's behaviorally easier to put X% in today and the rest on a schedule than to make the decision to put the lump sum in today. It's better to start the process than to waffle on if today is the day or not.

lordentropy 3y ago

If stock market always goes up in the long run, I bet you can mathematically prove that just investing all your money as soon as you have it beats any dollar cost averaging where you just invest a small amount in frequent intervals (and keep some of your money in cash).

StopTheWorld 3y ago
> If stock market always goes up in the long run The DJIA was 381.17 on September 3rd, 1929. It then went down and did not return to that level until over 25 years later - November 23rd, 1954. Factoring in inflation it would be losing money over a period of 25 years. The DJIA was 1,051.70 on January 11th, 1973. It then went down during a period of enormous inflation, until it hit that level again on November 3rd, 1982. We can look at the dot-com collapse in 2000, followed by the sub-prime collapse in 2008, which really roiled the economy, followed by the more recent period of stocks sinking last summer, inflation, FAANG layoffs, relatively tight VC money etc. As Keynes said, in the long run we're all dead. You can put your money in the market and be underwater for over 9 years, or even over 25 years. Of course, on the other hand you can be completely out and miss out during one of the go-go periods.
- throw0101b 3y ago
  > You can put your money in the market and be underwater for over 9 years, or even over 25 years. And in many cases, if you didn't cash out and crystallize your losses, you could still be fine: * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market... Also why diversification and asset allocation is important: having 20% in bonds in addition to being in the S&P 500 during the 2000s (post-dotcom, post-GFC) still allowed you to have an positive return: * https://www.forbes.com/sites/advisor/2010/09/13/its-not-really-a-lost-decade/ https://www.forbes.com/sites/advisor/2010/09/13/its-not-real... Some Bogleheads did a similar analysis for 1980s Japan bubble: having some bonds and foreign (non-JP) stocks, limiting your JP equities to (say) <60%, and rebalancing ~annually gave you really good numbers, even after the crash.
- upon_drumhead 3y ago

AlbertCory 3y ago

Debunking "debunking" articles. Wow, he talked to some "experts", ran a computer analysis, and now he's on the front page of Hacker News. > The main conclusion of this post is then [sic] invest all you have as soon as you can that's exactly the point of dollar cost averaging: if you're able to save, say, $250 a month, every month you buy $250 worth of something. Especially now that commissions are zero or nearly zero, it's a good thing to do.

evancox100 3y ago
The post defines that as “Systematic Investing”, while DCA is defined as taking a larger amount (e.g. a windfall of $10k) and deploying it over time instead of all at once. You can have your own definitions but this is clearly explained in the post.
- notimetorelax 3y ago
  There’s time value of money. For the DCA and LS the post compares investing money to accrue rate of return vs just keeping most in cash. Of course, given that stocks in average go up, it’s best to invest as soon as possible.
- AlbertCory 3y ago
  The title is clickbait, so you're wrong. DCA is what regular employees do with their 401K, so the title implies that they're doing investing wrong. They're not. The "LS" hypothesis corresponds to virtually no behavior in the real world.
- AlbertCory 3y ago
  "dollar cost averaging" is not subject to redefining. It's already got a long-established definition. The author is free to add new qualifiers to the word, but putting your regular salary deductions into a stock or index, e.g. your 401K, is DCA. https://www.investopedia.com/terms/d/dollarcostaveraging.asp https://www.investopedia.com/terms/d/dollarcostaveraging.asp https://www.forbes.com/advisor/investing/dollar-cost-averaging/ https://www.forbes.com/advisor/investing/dollar-cost-averagi...

317070 3y ago

Yes, lump sum maximises expected returns, but you typically don't want to just maximise expected returns. Volatility matters. If I give you this once in a lifetime trade: 100k for a 1 in a 1000 chance to win 500M, would you take it? There are very few people who would, even though it has 400k of expected returns, a whopping 400%. Most of us simply don't make enough money in a life to take that trade enough times to cope with its volatility. Elon Musk should probably take that trade though.

lordentropy 3y ago
If you have a long time horizon and invest in a broad-based index fund, why do you even care about short term volatility? If you need to withdraw money within the next few years, then yes volatility matters. But in that case, you might be better off not investing in stocks and go with less risky stuff.
- steveBK123 3y ago
  Everyone has a different definitions of short & long term, and the resulting volatility appetite. Volatility is also a lot easier to read and pontificate about than to experience in real time. What people do during draw downs is often emotion driven and for people who have never been through it, it's hard to infer from textbooks. And there have been periods where the market has been down for near a decade. If you put a lump sum at the 2000 peak, you wouldn't be back to even until the 2007 peak.. at which point it promptly crashed and didn't make back to even until 2013. (+/- a few years when you factor in dividends). Similar for 1973/1980/1982. Slow grind downs like the GFC are harder to experience as you watch slow losses pile up day after day for near 18 months.
- brnaftr361 3y ago
  I dunno MS took a really long time to recover it's peak. Even if you didn't buy the top it stayed flat for a very long time. Not that it happens in every instance, but at some point in managing it you have to consider opportunity cost, call a loser a loser, and pull out. 15 years to break even and that's without taking inflation into account.

cube2222 3y ago

I think it's well-known that DCA reduces risk, and not maximizes gain. With DCA you won't put all your money in one day before a crash.

evancox100 3y ago
The crash could still happen one day after you put the last dollar in. If you can’t handle such a crash, you need to invest less in stock all the time, not just for a few weeks/months after receiving a windfall.
- steveBK123 3y ago
  Sure let's say it happens the day after you put your last dollar in, but some of those dollars previously put in are up 1/5/10/20% depending on DCA pace. Therefore THOSE dollars don't experience the same loss as the last dollar which has not appreciated. Of course you are measuring that against the fact that the market generally goes up, so any dollars held outside the market are missing gains over time.

erentz 3y ago

This depends on your circumstance and its important to be a bit more cautious if you received a large lump sum (e.g. from a disability settlement) that you expect to need or live off. Yes the average person randomly assigned a lump sum on a random day will do much better if they deploy it immediately. But the tail person who gets the bad roll of the dice and receives it on a bad day will do much worse and may not have the money they needed to rely on. You're not the average person, you're just one person from the population, and you don't know if you'll be the one with the bad roll of the dice or not. That's why people DCA. If receiving a large lump sum like this you need to live off, either DCA over 12-24 months, or make sure you have some really good tactical allocation system that moves you to safety in the first few years.

Thorrez 3y ago

Instead of comparing them based on the average expected value and the variance, and trying to evaluate the trade-off between them in your head, how about comparing them based on the median case, the 40th percentile case, the 30th percentile case. That allows returns and variance to be combined into one number, allowing more intuitive comparison and evaluation of the trade-off.

eldfgl 3y ago

Yeah if you don't need personal liquidity, throw it all at the market! Haha

Thorrez 3y ago

This doesn't seem too take into account that uninvested money could earn interest in a high yield savings account, or government bonds.

65 3y ago

If you make a salary from your job, dollar cost averaging makes more sense than saving up your salary and then lump sum investing it at some point in time. Randomly getting a huge lump sum of money would only happen very rarely. In reality, investing your paycheck each week is a much better method of investing than either trying to play the market or saving up in a low yield savings account. This is horrible advice for the vast majority of investors who are getting paychecks each week. Just because it's on the front page of Hacker News does not mean it's true.

embwbam 3y ago
This usually comes up because people procrastinate investing and end up with a large amount of money sitting idle. They have anxiety about how to put it into the markets. Saving with each paycheck isn’t dollar cost averaging. It’s lump sum. DCA would be something like putting 1/4 of your total savings every week. Anyway, in my experience this situation comes up a lot due to the above
- AlbertCory 3y ago
  How is putting 10% of your salary each paycheck NOT dollar-cost averaging? Let's assume you're just buying a broad-based index fund. The same amount of money buys fewer shares when the index is up, and more when it's down. That is the very definition of DCA.
rflrob 3y ago
The introduction (but nowhere in the rest of the article) makes a distinction between Dollar Cost Averaging (where you spread out a windfall over some period of time) and systematic investing (SI; where you regularly invest income as you get it). I suspect the author would not advocate for saving up your weekly paycheck and investing it as a large chunk. > The difference between DCA and SI is that in DCA you have all the money available since the beginning, but in SI you have to wait until the next month to have access to the quantity to be invested.
alexmolas 3y ago
This is why in the post I differentiate between dollar cost averaging and systematic investment. Investing a part of your salary every month is basically the same as lump sum. I don't defend in any moment to save money during the year and invest it after some months. Actually, my advice is to invest the most you can as soon as you can. And in many cases this means to invest a fixed amount of money every month.

MrPatan 3y ago

DCA is about ease of implementation and regret minimisation, not ev optimisation.

ljsb 3y ago

Dollar Cost Averaging a lump sum might reduce your risk while you're averaging in, but why weren't you happy with the risk/return profile in the first place? And are you happy with increasingly higher risk/return as you commit more of your lump sum? Isn't it better to pick a portfolio with a risk profile you're happy with in the first place, then commit your entire lump sum?

cj 3y ago
> Dollar Cost Averaging a lump sum might reduce your risk while you're averaging in, but why weren't you happy with the risk/return profile in the first place? If I suddenly inherited $1m in cash and I planned out my desired portfolio allocation, I would want to enter into it over the course of at least a couple months because: 1) Interest rates are so high, you'd still be doing well earning 5% interest with the money parked in money market / bond / treasury ETFs. This significantly reduces the opportunity cost of waiting to invest the money or entering into a position slowly over time. 2) Markets fluctuate on a day to day basis often in response to things like fed meetings, jobs reports, earnings announcements, etc. You can average out the volatility by entering into the position over a few months (which, again, due to high interest on extremely low-risk cash/treasuries/bonds returning ~5% currently, the opportunity cost is minimal).

hansvm 3y ago

Stated another way, the author believes (probably rightly so) that stocks outperform cash equivalents, and they're pointing out that the "intuition" behind DCA doesn't actually add up when you tally all the contributions. DCA is just a way to choose your security/cash split at different points in time though. Their relative performance at different points in time greatly impacts the results. Any time you have additional (probabilistic) information to bear on the problem, DCA can start to look a lot more attractive. For example, if you expect that in some time horizon there will be a dip of unknown magnitude and unknown bottom timing, then DCA outperforms many alternatives including buying up-front. Anywho, just take care to blend what you know about the market (probably approximately nothing) with what your goals are (0% chance of hitting $0 vs a low chance of hitting $10M+ vs highest average yield no matter what vs highest yield predicated on being able to afford an upcoming purchase vs whatever else floats your boat). The right strategy for somebody else is not necessarily the right strategy for you.

nimos 3y ago

Five years is a fairly long time to DCA and you would presumably park the rest of the money in a tbill ladder or even something slightly riskier. Not taking that into account is pretty significant considering the time period in question. ex 3 month tbills were yielding 12% at the start of the period. There is a fairly significant body of work around this idea by professionals in the field and a pretty well established set of trade offs between lump sum and DCA. This isn't really a "debunking" so much as it's a fairly naïve and uncharitable comparison of DCA vs LS.

throw0101b 3y ago

If you already have a pile of money, then lump sum investing is better. But sitting in cash until you have a pile of money, is worse: * https://ofdollarsanddata.com/dollar-cost-averaging-vs-lump-sum/ https://ofdollarsanddata.com/dollar-cost-averaging-vs-lump-s... Most of us do not have a pile of cash though, so it's better to get in the market a little every month: * https://ofdollarsanddata.com/just-keep-buying/ https://ofdollarsanddata.com/just-keep-buying/ * https://www.goodreads.com/en/book/show/59046778 https://www.goodreads.com/en/book/show/59046778 And waiting to buy the dip doesn't work any better: * https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...

Havoc 3y ago

People react poorly to being told as much though. And if it gets people into a saving monthly then perhaps it is not the worst of things