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Debunking the Myth of Dollar Cost Averaging

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Re: Debunking the Myth of Dollar Cost Averaging

#41

Post by nimos »

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.

Re: Debunking the Myth of Dollar Cost Averaging

#42

Post by stouset »

brnaftr361 wrote: post #30
lordentropy wrote: post #15

Earlier quoted context omitted.

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.

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.

Playing individual stocks is a fool’s game. Yes, the random stock you pick could turn out to be a terrible investment for any number of reasons.

Re: Debunking the Myth of Dollar Cost Averaging

#43

Post by AlbertCory »

evancox100 wrote: post #13
AlbertCory wrote: post #8

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.

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.

Re: Debunking the Myth of Dollar Cost Averaging

#44

Post by rufus_foreman »

NotYourLawyer wrote: post #26
317070 wrote: post #9

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…

Utility isn’t linear in dollars. I’d be just about as happy with 100 million as 500 million.

How do you know?

When I first started investing and only had a little money, I remember thinking that if I had twice as much, my money worries would be over. Many years later, I have 50 times as much money as then, and part of me still thinks that if I had twice as much as I have now, my money worries would be over.

And the other part knows that I am just the type of person who constantly worries about money.

Re: Debunking the Myth of Dollar Cost Averaging

#45

Post by cj »

ljsb wrote: post #36

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?

> 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).

Re: Debunking the Myth of Dollar Cost Averaging

#46

Post by throw0101b »

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-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://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-co...

Re: Debunking the Myth of Dollar Cost Averaging

#47

Post by bitshiftfaced »

seanhunter wrote: post #34
bitshiftfaced wrote: post #20

Earlier quoted context omitted.

The sharpe ratio is a common metric used to balance risk and reward. Based on the figures in this article, I'm almost positive that "lump sum" would outperform DCA's sharpe as well. 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.

I don't think Sharpe is the right metric here and it has the same flaw as the article. Neither the article nor the sharpe ratio would take into account the fact that in his test much of the capital would remain uninvested for the begining of the dollar cost averaging strategy so it would seem to underperform literally because far less capital would be put to work for the beginning of the test period. The use case for…

The underlying idea behind DCA is that by investing a fixed amount every month, you'll naturally buy less shares when the market is overheating and more shares when it's undervalued. Contrast this with trying to time the market so that you're buying up shares during a down market. The author substituted in "buy immediately" for "time the market."

I'd say that the strategy you're referring to is the same as "buy immediately (whenever you can afford it)," but interpreted in a DCA light.

You're right that it matters if we're talking about whether or not you have an existing savings you want to invest. But I don't see that distinction to matter here, since many people believe DCA is powerful because it rejects the idea of market timing and reduces risk, not because they're trying to put their money to work as fast as possible.

Re: Debunking the Myth of Dollar Cost Averaging

#48

Post by throw0101b »

rufus_foreman wrote: post #44
NotYourLawyer wrote: post #26

Earlier quoted context omitted.

Utility isn’t linear in dollars. I’d be just about as happy with 100 million as 500 million.

How do you know? When I first started investing and only had a little money, I remember thinking that if I had twice as much, my money worries would be over. Many years later, I have 50 times as much money as then, and part of me still thinks that if I had twice as much as I have now, my money worries would be over. And the other part knows that I am just the type of person who constantly worries about money.

>> Utility isn’t linear in dollars.

> How do you know?

Empirical evidence:

> Technically, the researchers found that life satisfaction rises with the log of income[1] (i.e. multiples of income), not linear changes in income. The reason why log income is more relevant here is because someone with $10,000 might be much happier than someone with $0. However, someone with $10,010,000 is probably no happier than someone with $10,000,000. In other words, $10,000 means a lot to someone with nothing, but nothing to someone with a lot. I’ve written on how this idea applies to wealth[2] in the past and I plan on expanding on it in the future.

[…]

> In 2021, a study by Matthew Killingsworth[3] titled “Experienced well-being rises with income, even above $75,000 per year” shook the foundations of happiness research by contradicting the findings from Kahneman and Deaton’s famed 2010 paper. In particular, Killingsworth’s study found that both life satisfaction and emotional well-being continued to increase with income (i.e. the log of income), even beyond the $75,000 threshold reported by Kahneman and Deaton.

* https://ofdollarsanddata.com/money-cant-buy-happiness/

Re: Debunking the Myth of Dollar Cost Averaging

#49

Post by throw0101b »

readthenotes1 wrote: post #28
317070 wrote: post #9

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…

Your once in a lifetime trade is flawed in 2 ways: 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 re…

> 1. the S&P 500 has never gone completely to zero.

The S&P 500 specifically, no. But markets have gone to zero when (e.g.) there were Communist revolutions and private property went away.

If you were invested in those then you'd lose the money (and if it was as a domestic investor you'd have other (political) problems as well).

Re: Debunking the Myth of Dollar Cost Averaging

#50

Post by throw0101b »

StopTheWorld wrote: post #25
lordentropy wrote: post #7

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).

> 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, 198…

> 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...

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-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.

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