Why Dollar Cost averaging is lousy

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Saphomd
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Why Dollar Cost averaging is lousy

Post by Saphomd » Wed Feb 15, 2017 1:50 pm

http://www.msn.com/en-us/money/savingan ... strategy/a


Dont think this can be opened up. Can someone with more computer knowledge help?
Last edited by Saphomd on Wed Feb 15, 2017 1:52 pm, edited 1 time in total.

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Re: Why Dollar Cost averaging is lousy

Post by oldcomputerguy » Wed Feb 15, 2017 1:51 pm

Link is broken.
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MindTheGAAP
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Re: Why Dollar Cost averaging is lousy

Post by MindTheGAAP » Wed Feb 15, 2017 1:56 pm

"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

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Re: Why Dollar Cost averaging is lousy

Post by Saphomd » Wed Feb 15, 2017 1:57 pm

Thanks :sharebeer

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Re: Why Dollar Cost averaging is lousy

Post by randomguy » Wed Feb 15, 2017 1:59 pm

I could write an article saying buying bonds is lousy. Well over 2/3rds of the time you will do better just going 100% stocks. It is all about if you care about that last 1/3 of a case.

But yeah you are better off lump summing than DCAing from a numbers point of view. DCA is more about emotional mangement. Panic selling (you invest all your money and the market does a normal 10% dip and you sell) is a financial disaster. And it is very common. We still see articles about people who lost their savings in 2008-9 despite markets having long since recovered.

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Dutch
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Re: Why Dollar Cost averaging is lousy

Post by Dutch » Wed Feb 15, 2017 2:01 pm

I get paid twice a month

MindTheGAAP
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Re: Why Dollar Cost averaging is lousy

Post by MindTheGAAP » Wed Feb 15, 2017 2:22 pm

Let's all be clear, this is saying if you have a significant lump sump from an inheritance or bonus of some sort, you're better dropping it all in at once vs. DCA. It is not saying that you should lean against DCA if you are making regular ongoing contributions.

Basic takeaway for me: get your money in the market as soon as realistic at the AA you plan to use. Same reason people will drop in their annual IRA contribution on 1/1 instead of spreading across the year.
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Re: Why Dollar Cost averaging is lousy

Post by ruralavalon » Wed Feb 15, 2017 2:29 pm

Dutch wrote:I get paid twice a month

So invest regularly every pay period. Investing regularly every pay period is certainly a good idea. That's not what the article is about.

The article is all about what to do if you have "a large lump sum of cash you want to invest for retirement -- a windfall, an inheritance, a pension payout, whatever".
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Re: Why Dollar Cost averaging is lousy

Post by Jags4186 » Wed Feb 15, 2017 2:37 pm

Everyone does things which are not optimal from a return standpoint. Everyone's investment objectives aren't to make the maximum return.

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Re: Why Dollar Cost averaging is lousy

Post by Saphomd » Wed Feb 15, 2017 2:47 pm

It was already mentioned, but DCA is more about emotions and lets people sleep better at night. If you DCA or lump sum cash, you are still investing in the market.

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Re: Why Dollar Cost averaging is lousy

Post by wolf359 » Wed Feb 15, 2017 2:58 pm

ruralavalon wrote:
Dutch wrote:I get paid twice a month

So invest regularly every pay period. Investing regularly every pay period is certainly a good idea. That's not what the article is about.

The article is all about what to do if you have "a large lump sum of cash you want to invest for retirement -- a windfall, an inheritance, a pension payout, whatever".


This is really a misleading article.

Their point is that when investing a large amount for the long term, it is better to invest it all at once rather than dollar cost averaging it into the market. Does it matter if the reason is for retirement versus a different long-term goal? Throwing the phrase "when investing for retirement" is unnecessary to make their point. Most retirement investing is done by saving part of a paycheck, which does not arrive in a lump sum.

Most investing for retirement is done with dollar cost averaging. Find me an IRA or 401k plan (where I'd argue a lot if not most retirement investing is conducted) where they are investing with large lump sums.

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Dutch
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Re: Why Dollar Cost averaging is lousy

Post by Dutch » Wed Feb 15, 2017 3:09 pm

ruralavalon wrote:
Dutch wrote:I get paid twice a month

So invest regularly every pay period. Investing regularly every pay period is certainly a good idea. That's not what the article is about.

The article is all about what to do if you have "a large lump sum of cash you want to invest for retirement -- a windfall, an inheritance, a pension payout, whatever".


Right, I guess my point is that I don't have a lump-sum to invest. Nor do most people. So this "debate" is pretty much academic from where I'm standing.

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Re: Why Dollar Cost averaging is lousy

Post by ruralavalon » Wed Feb 15, 2017 3:13 pm

Dutch wrote:
ruralavalon wrote:
Dutch wrote:I get paid twice a month

So invest regularly every pay period. Investing regularly every pay period is certainly a good idea. That's not what the article is about.

The article is all about what to do if you have "a large lump sum of cash you want to invest for retirement -- a windfall, an inheritance, a pension payout, whatever".


Right, I guess my point is that I don't have a lump-sum to invest. Nor do most people. So this "debate" is pretty much academic from where I'm standing.

This confusion always comes up :( . That's because the term "dollar-cost averaging" is used in two different contexts to mean two entirely different things.

In general I feel that it's better to invest money whenever you have money available to invest, rather than waiting.
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Re: Why Dollar Cost averaging is lousy

Post by livesoft » Wed Feb 15, 2017 3:16 pm

Nothing new here in the re-hash of a Vanguard article. I'll restate it for folks who don't like to click:

Lump Sum is not lousy, but neither is Dollar Cost Averaging. Lump Sum (LS) outperforms a 12-month monthly Dollar-Cost Averaging (DCA) program about two-thirds of the time. That outperformance is about 2% for a 60/40 portfolio.

That means one pays about 2% "insurance" for the one-third chance the LS will do worse than DCA over a 12-month period.

One can dial in any intermediate amount of insurance (lower performance) that they want to. For instance, if one does LS of 50% of their windfall and then DCA's the rest over the next 12 months, expect to pay about 1% insurance. Or if one doesn't DCA over 12 months, but over 6 months, then expect to pay 1% insurance. Or if one invests 50% now and DcAs over 6 months, expect to pay 0.5% insurance. Half a percent is basically in the noise of daily returns.

Or one could LS 50% of the windfall, start DCAing the rest over the next 12 months, but if the market is lower than the LS date, invest it all then.

There are lots of variations that none of these studies ever test.
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Re: Why Dollar Cost averaging is lousy

Post by Toons » Wed Feb 15, 2017 3:30 pm

I would say that making the choice to "Not Invest" is lousy.
Dollar Cost,Lump Sum,,whatever choice you make "To Invest",,is excellent :mrgreen:
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JoMoney
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Re: Why Dollar Cost averaging is lousy

Post by JoMoney » Wed Feb 15, 2017 3:45 pm

I'm going to point back at the legendary Market Timer thread
That was certainly an example where lumping into the market was lousy.
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toto238
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Re: Why Dollar Cost averaging is lousy

Post by toto238 » Wed Feb 15, 2017 4:06 pm

The biggest danger in trying to DCA a large sum is the behavioral finance issues. It lends itself to market timing very easily as the investor watches the daily/weekly/monthly market movements and either holds back or accelerates their investments based on how nervous it makes them.

If you're investing in 80% stock or above, doing a little bit of DCA may help relieve some behavioral issues though. A volatile portfolio could frighten an investor if it has a big dip just after a large investment. This leads to the extremely common investment behavior where people wait until everyone is talking about how great stocks are to invest in the stock market. Then it crashes, they lose half their money and sell out at a low. They swear off the stock market for good. Then they stay in cash until they start hearing people talking about stocks being great again, then buy in again. Eventually they stop investing forever because they think the stock market is a scam.

A little bit of DCAing over a period of no more than 12 months won't do too much harm, and could definitely be of benefit to investors who get jumpy at the first sign of market volatility.

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Re: Why Dollar Cost averaging is lousy

Post by White Coat Investor » Wed Feb 15, 2017 4:11 pm

randomguy wrote:I could write an article saying buying bonds is lousy. Well over 2/3rds of the time you will do better just going 100% stocks. It is all about if you care about that last 1/3 of a case.

But yeah you are better off lump summing than DCAing from a numbers point of view. DCA is more about emotional mangement. Panic selling (you invest all your money and the market does a normal 10% dip and you sell) is a financial disaster. And it is very common. We still see articles about people who lost their savings in 2008-9 despite markets having long since recovered.


But using that same argument you can say people should invest in whole life insurance or CDs or whatever. It's usually not the right thing to do, but if you're a terrible investor and can't stay the course in a bear market, you may come out ahead.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Why Dollar Cost averaging is lousy

Post by White Coat Investor » Wed Feb 15, 2017 4:12 pm

JoMoney wrote:I'm going to point back at the legendary Market Timer thread
That was certainly an example where lumping into the market was lousy.


Especially when you borrow hundreds of thousands to invest in derivatives.

To be fair, Market Timer did eventually drag his net worth back to zero and is doing quite well these days. But he did learn his lesson.
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Re: Why Dollar Cost averaging is lousy

Post by nisiprius » Wed Feb 15, 2017 5:59 pm

Although it is a little tangential to the normal (never-to-be-resolved) argument, I do feel that rather than investing a large sum literally all at once, it is reasonable to divide it up into fractions and spread it out in installments over a not-too-long period of time. For example, split it into quarters and invest 1/4 every week at weekly intervals. Yes, I really do this from time to time. My rationale is that the market's day-to-day movements have a standard deviation of close to 1%. If we assume (not a good assumption but what can you do) that the market's level at intervals of a week are almost independent, then making four investments at intervals of a week theoretically cuts your standard deviation in half, but only foregoes about two weeks' worth of stock market growth or 0.4%.

Actually I don't really do it because of any math. I do it because I just plain hate the idea of making a coin-flip bet on about 1% of my investment depending on the luck of the particular day I invest. I just feel better about only committing 1/4 on each of four different days.
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Re: Why Dollar Cost averaging is lousy

Post by jadedfalcons » Wed Feb 15, 2017 6:11 pm

I've been dollar cost averaging my excess cash for nearly a year now, and will continue to do so for another two years until I get my cash levels where I want them to be. In hindsight, money dumped in a year ago would have grown a lot by today, so I'm behind the curve there.

I also remember buying $3,000 worth of AT&T (I was 17 at the time) back in 1999 for $56.xx a share.

Then I watched those shares crash to $20. Today, they're worth $41.12. Outside of dropping $3k on a new Vanguard mutual fund, I never drop large amounts all at once anymore.

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Re: Why Dollar Cost averaging is lousy

Post by SGM » Wed Feb 15, 2017 7:31 pm

Back when I was investing in DRIPs many years ago I invested the same amount every month for years. If one of the stock prices were lower I might add a little more to that stock plan very occasionally. A good thing about having a DRIP was that it was very inexpensive. Some companies had no fees at all and sent me a SASE every month. Now many DRIPs have higher fees. What I liked best about it was that in order to sell the stock I needed to write a letter or if I held the stock certificate in a box at the bank I also needed a signature guarantee to get it into a brokerage account. I also had to calculate the capital gains or losses from my records .Making it more difficult to sell than a click on the computer was helpful in staying the course over many years and in down markets.

We have had some lump sums over the last few years and we invested all at once regardless of market levels.

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Re: Why Dollar Cost averaging is lousy

Post by randomguy » Wed Feb 15, 2017 11:03 pm

White Coat Investor wrote:
randomguy wrote:I could write an article saying buying bonds is lousy. Well over 2/3rds of the time you will do better just going 100% stocks. It is all about if you care about that last 1/3 of a case.

But yeah you are better off lump summing than DCAing from a numbers point of view. DCA is more about emotional mangement. Panic selling (you invest all your money and the market does a normal 10% dip and you sell) is a financial disaster. And it is very common. We still see articles about people who lost their savings in 2008-9 despite markets having long since recovered.


But using that same argument you can say people should invest in whole life insurance or CDs or whatever. It's usually not the right thing to do, but if you're a terrible investor and can't stay the course in a bear market, you may come out ahead.


And for some people those suboptimal investments are the best they can do. The DCA helps for the intermediate group who just doesn't want to see a 10% loss the week after they invest more money than they have every seen. Investing over a year reduces the chance of that significantly (still can happen with large drops but the minor 10% changes are taken care of) at the expense of slightly lower returns of a period of time. Seems like an acceptable trade off.

In the end this is the type of choice that will rarely matter. Getting (or not getting) a year or two of stock market exposure isn't going to make a huge difference 99% of the time. Your odds of missing out on a +30 or -30% year just aren't very high.

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Re: Why Dollar Cost averaging is lousy

Post by avalpert » Wed Feb 15, 2017 11:20 pm

randomguy wrote:
White Coat Investor wrote:
randomguy wrote:I could write an article saying buying bonds is lousy. Well over 2/3rds of the time you will do better just going 100% stocks. It is all about if you care about that last 1/3 of a case.

But yeah you are better off lump summing than DCAing from a numbers point of view. DCA is more about emotional mangement. Panic selling (you invest all your money and the market does a normal 10% dip and you sell) is a financial disaster. And it is very common. We still see articles about people who lost their savings in 2008-9 despite markets having long since recovered.


But using that same argument you can say people should invest in whole life insurance or CDs or whatever. It's usually not the right thing to do, but if you're a terrible investor and can't stay the course in a bear market, you may come out ahead.


And for some people those suboptimal investments are the best they can do. The DCA helps for the intermediate group who just doesn't want to see a 10% loss the week after they invest more money than they have every seen. Investing over a year reduces the chance of that significantly (still can happen with large drops but the minor 10% changes are taken care of) at the expense of slightly lower returns of a period of time. Seems like an acceptable trade off.


Only if they are going to be able to handle that 10% loss one week after they make their last DCA investment better then they would have if they lump summed. I wouldn't be surprised if DCA often ends up putting people in riskier portfolios than they are prepared for and ends up hurting them long term because they didn't figure out up front what risk they really wanted/needed/had the ability to take.

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