Debunking the Myth of Dollar Cost Averaging
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Debunking the Myth of Dollar Cost Averaging
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Re: Debunking the Myth of Dollar Cost Averaging
#2Doesn'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.
Re: Debunking the Myth of Dollar Cost Averaging
#3[dead]
Re: Debunking the Myth of Dollar Cost Averaging
#4People (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.
Re: Debunking the Myth of Dollar Cost Averaging
#5Doesn'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.
> 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.
Re: Debunking the Myth of Dollar Cost Averaging
#6Doesn'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".
Re: Debunking the Myth of Dollar Cost Averaging
#7If 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).
Re: Debunking the Myth of Dollar Cost Averaging
#8Debunking "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.
Re: Debunking the Myth of Dollar Cost Averaging
#9Yes, 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.
Re: Debunking the Myth of Dollar Cost Averaging
#10I 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.