21–30 of 61 posts
That allows returns and variance to be combined into one number, allowing more intuitive comparison and evaluation of the trade-off.
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.
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.
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.
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).
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.
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…
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…
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.
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.
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…
1. the S&P 500 has never gone completely to zero. It is not the typical gamble where you lose the entirety of your bet if the random doesn't happen your way.
2. you're assuming that it is an event instead of an investment where time matters, where are you are making multiple bets and historically the random is in your favor.
It can take 20 years for the S&P 500 to regain its former position if you include inflation, but for most people learning about investing, that is about a half of their expected investment 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.
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…
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.