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
Debunking the Myth of Dollar Cost Averaging
51–60 of 61 posts
Re: Debunking the Myth of Dollar Cost Averaging
#52Earlier quoted context omitted.
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 w…
My "how do you know" was more directed at "I’d be just about as happy with 100 million as 500 million". I agree with the log part.
Wouldn't we expect them to be happier with their wealth doubled more than twice?
Re: Debunking the Myth of Dollar Cost Averaging
#53If 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…
The article's conclusion actually specifically calls out that
> This is because when one decides to follow DCA is implicitly expecting that the market to fall in the recent future. However, our experience - at least as far S&P 500 is concerned - tells us that this is not what happens.
Which is basically saying that the S&P 500 always goes up in the long run.
Re: Debunking the Myth of Dollar Cost Averaging
#54If 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 f…
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
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.
Re: Debunking the Myth of Dollar Cost Averaging
#55Earlier quoted context omitted.
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 immed…
Yeah. Pretty sure the "magic" of DCA is just the magic of compounding. To be fair though that is one of the most powerful things in finance.
Re: Debunking the Myth of Dollar Cost Averaging
#56Yes, 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.
Your heirs/descendants wouldn't be.
Re: Debunking the Myth of Dollar Cost Averaging
#57Debunking "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.
"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.forbes.com/advisor/investing/dollar-cost-averagi...
Re: Debunking the Myth of Dollar Cost Averaging
#58Earlier quoted context omitted.
Utility isn’t linear in dollars. I’d be just about as happy with 100 million as 500 million.
Your heirs/descendants wouldn't be.
My kids would be. My theoretical grandkids probably would be too. Anything farther out than that is too attenuated for me to care much about.
Anyway, most family wealth doesn’t turn into a dynasty. Usually the first generation that didn’t have to work for it ends up pissing it all away.
Re: Debunking the Myth of Dollar Cost Averaging
#59Earlier quoted context omitted.
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).
That is certainly a quibble. DCA is an artifact of retirement plans in Western countries, notably the United States.
It is certainly possible for the United States to dissolve in an asteroid impact, but those tail risk type events are not worth worrying about for the type of investor that is going to be thinking about dollar cost averaging.
Re: Debunking the Myth of Dollar Cost Averaging
#60Earlier quoted context omitted.
Your heirs/descendants wouldn't be.
My kids would be. My theoretical grandkids probably would be too. Anything farther out than that is too attenuated for me to care much about. Anyway, most family wealth doesn’t turn into a dynasty. Usually the first generation that didn’t have to work for it ends up pissing it all away.
Thanks for noticing the implications.
Your great-grandkids would find utility, as would their children's children. It's their perspective that matters for utility, not yours.
The fun thing is people talk log utility but forget there's an exponential process (children) that can follow until the lineage dies out.
Agreed it gets pissed away. Which means the children process doesn't have to be particularly exponential to make log utility become linear looking for all practical values when one includes descendants.