11–20 of 61 posts
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".
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.
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.
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…
You can have your own definitions but this is clearly explained in the post.
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.
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 c…
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.
Clearly investing $400 of saving each month is not the person this article is talking about.
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…
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.
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.
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.
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.
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.
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 c…
A good way to respond to your example would also be to bring in a discussion of the St. Petersburg paradox and expected utility theory.