An economist dismisses the idea of dollar cost averaging

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blgaarder
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An economist dismisses the idea of dollar cost averaging

Post by blgaarder » Sun Jan 07, 2018 11:51 am

I was reading the revised version of Steven Landsburg's The Armchair Economist and found chapter 19 to be interesting.

Beginning on page 237, he looks at dollar cost averaging.

An excerpt:

"Having money in the stock market for 10 months is like betting on the spins of 10 roulette wheels. If you dollar-cost average, adding $1,000 to your investment each month, then you have $1,000 riding on the first spin, $2,000 on the second, $3,000 on the third, an so on. But we've just agreed that this is a great mistake. The wise gambler bets $5,500 on each wheel. In terms of investment strategy, this means that you should invest $5,500 the first month; then adjust your holdings up or down as necessary so that your stock is always worth $5,500. (If the value falls to $5,000, invest another $500; if it rises to $6,000, sell $500 worth of stock.)"

That was based on the random walk theory, he talks about DCA in the non-random walk situation.

Please read the chapter before responding.

He dumps on Bob Brinker of Moneytalks.

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Re: An economist dismisses the idea of dollar cost averaging

Post by dbr » Sun Jan 07, 2018 12:21 pm

blgaarder wrote:
Sun Jan 07, 2018 11:51 am
I was reading the revised version of Steven Landsburg's The Armchair Economist and found chapter 19 to be interesting.

Beginning on page 237, he looks at dollar cost averaging.

An excerpt:

"Having money in the stock market for 10 months is like betting on the spins of 10 roulette wheels. If you dollar-cost average, adding $1,000 to your investment each month, then you have $1,000 riding on the first spin, $2,000 on the second, $3,000 on the third, an so on. But we've just agreed that this is a great mistake. The wise gambler bets $5,500 on each wheel. In terms of investment strategy, this means that you should invest $5,500 the first month; then adjust your holdings up or down as necessary so that your stock is always worth $5,500. (If the value falls to $5,000, invest another $500; if it rises to $6,000, sell $500 worth of stock.)"

That was based on the random walk theory, he talks about DCA in the non-random walk situation.

Please read the chapter before responding.

He dumps on Bob Brinker of Moneytalks.
I couldn't find a straightforward way to access the book and read Chapter 19, so I will have no comment on your post.

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nedsaid
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Re: An economist dismisses the idea of dollar cost averaging

Post by nedsaid » Sun Jan 07, 2018 12:33 pm

First of all investing is not gambling. It is buying a share of the means of production in a capitalist economy and sharing in the fruits of capitalism. You are buying equity and debt of real economic entities in a real economy. It isn't putting money down on a spin of a roulette wheel. So his analogy was really bad.

In the real world, most of us make money bit by bit with our paychecks from our job. Very, very few of us get a lot of wealth upfront in our careers. Because we earn our money bit by bit, we have to invest bit by bit. This means dollar cost averaging. Really no other way for most of us regular Joes and Janes to invest.

I think it was President Truman that said that if you took all the economists in the world and laid them end to end that it would be a very good idea. No wonder they call economics the dismal science. I just don't agree with the premise of the article or the analogy that the author uses.
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Re: An economist dismisses the idea of dollar cost averaging

Post by JakeyLee » Sun Jan 07, 2018 12:35 pm

I read the book, and would recommend to folks who like all perspectives of finance, investing, etc.. On the surface I believe we all agree that lump sum investing makes more sense. Back testing seems to "prove" such a theory. However, most Americans begin their investment journey with their 401ks. They simply don't have means or capacity to dump in the max in January. Not in the beginning of their careers anyway. Years go by, they buy with each paycheck, and maybe even figure out a way to max it out. They wake up one day, looking at their balance, and feel proud/accomplished with what dollars cost averaging has done for them. Rinse repeat. Confirmation bias? Maybe a little. But I certainly don't think most "dollar cost average" because they believe it is most the most efficient way to invest. They do it because they "believe" they have no other choice.

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Re: An economist dismisses the idea of dollar cost averaging

Post by Jack FFR1846 » Sun Jan 07, 2018 12:38 pm

My own personal take on DCA is that if I have the money and want to invest it, then I want to invest it, right? I don't want to play games trying to pick up a little more possible pennies. It all gets invested....NOW. I see DCA as a sign that the investor has not decided to invest, so they put in a little at a time.
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Re: An economist dismisses the idea of dollar cost averaging

Post by randomizer » Sun Jan 07, 2018 12:42 pm

Is the author talking about value averaging? I can't tell from the excerpt.
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Re: An economist dismisses the idea of dollar cost averaging

Post by johnbarry » Sun Jan 07, 2018 12:53 pm

nedsaid wrote:
Sun Jan 07, 2018 12:33 pm
First of all investing is not gambling. It is buying a share of the means of production in a capitalist economy and sharing in the fruits of capitalism. You are buying equity and debt of real economic entities in a real economy. It isn't putting money down on a spin of a roulette wheel. So his analogy was really bad.
I think the analogy is about the fact that returns are random and that you cannot reliably predict whether the stock market will go up or down over the next month. On average returns are positive (so it's a roulette wheel that wins on average), but it's an uncertain event.

I think the limitation to the theory that you and other BHs point out is exactly right, i.e., if you don't have the money up front, is it better to borrow in order invest or just add to your holdings paycheck to paycheck? Borrowing a large amount to have constant investment seems pretty risky.

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Re: An economist dismisses the idea of dollar cost averaging

Post by nedsaid » Sun Jan 07, 2018 1:04 pm

johnbarry wrote:
Sun Jan 07, 2018 12:53 pm
nedsaid wrote:
Sun Jan 07, 2018 12:33 pm
First of all investing is not gambling. It is buying a share of the means of production in a capitalist economy and sharing in the fruits of capitalism. You are buying equity and debt of real economic entities in a real economy. It isn't putting money down on a spin of a roulette wheel. So his analogy was really bad.
I think the analogy is about the fact that returns are random and that you cannot reliably predict whether the stock market will go up or down over the next month. On average returns are positive (so it's a roulette wheel that wins on average), but it's an uncertain event.

I think the limitation to the theory that you and other BHs point out is exactly right, i.e., if you don't have the money up front, is it better to borrow in order invest or just add to your holdings paycheck to paycheck? Borrowing a large amount to have constant investment seems pretty risky.
I can see the point about random returns but it is random returns with an upward bias and there is a big difference. I invest in the stock market because historically the market goes up over time. Historically, the US Stock Market returns 9%-11% over long time periods. The uncertainty lies in that the market sometimes goes down and we don't know the distribution of returns. The market can go up suddenly, unexpectedly, and violently but you don't know when. Best to be on the train when it leaves the station.
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Re: An economist dismisses the idea of dollar cost averaging

Post by bottlecap » Sun Jan 07, 2018 1:18 pm

DCA is not a good idea because it gives you better returns. If your expected return is positive, you are always better off 'betting" more. You don't need to be an economist to realize that.

DCA is a better idea than sitting on the sidelines in the hopes of a downturn. It permits someone to invest who is worried about putting their money all in at once and suffering an immediate downturn.

It's a trick to get around analysis paralysis.

It works because losing money has a more negative impact on one's emotional state than making money has a positive effect.

JT

P.S. Investing every paycheck is not DCAing, so that's not the situation the economist is talking about.
Last edited by bottlecap on Sun Jan 07, 2018 1:37 pm, edited 1 time in total.

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Re: An economist dismisses the idea of dollar cost averaging

Post by cherijoh » Sun Jan 07, 2018 1:26 pm

blgaarder wrote:
Sun Jan 07, 2018 11:51 am
I was reading the revised version of Steven Landsburg's The Armchair Economist and found chapter 19 to be interesting.

Beginning on page 237, he looks at dollar cost averaging.

An excerpt:

"Having money in the stock market for 10 months is like betting on the spins of 10 roulette wheels. If you dollar-cost average, adding $1,000 to your investment each month, then you have $1,000 riding on the first spin, $2,000 on the second, $3,000 on the third, an so on. But we've just agreed that this is a great mistake. The wise gambler bets $5,500 on each wheel. In terms of investment strategy, this means that you should invest $5,500 the first month; then adjust your holdings up or down as necessary so that your stock is always worth $5,500. (If the value falls to $5,000, invest another $500; if it rises to $6,000, sell $500 worth of stock.)"

That was based on the random walk theory, he talks about DCA in the non-random walk situation.

Please read the chapter before responding.

He dumps on Bob Brinker of Moneytalks.
For many people, their only stock market investing is in a 401k or other workplace retirement plan. Many plans match employee contributions only on a paycheck-by-paycheck basis. In that case, they would be stupid NOT to DCA their investments into their employer plan.

Besides that, the overall stock market is highly auto-correlated with it's prior values which totally negates his roulette analogy. (Individual stock prices have a more random component but still have elements of auto-correlation). I wouldn't trust any "economist" who made the very elementary mistake of saying that prices are randomly distributed on a monthly basis. Just look at this historical chart for the S&P 500.

EDITED to add: Unless you have a windfall you are rarely in the position to invest a lump sum. You are either accumulating money on the side lines or borrowing money to invest. Neither of which appeals to me.
Last edited by cherijoh on Sun Jan 07, 2018 1:31 pm, edited 1 time in total.

CppCoder
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Re: An economist dismisses the idea of dollar cost averaging

Post by CppCoder » Sun Jan 07, 2018 1:30 pm

nedsaid wrote:
Sun Jan 07, 2018 12:33 pm
I think it was President Truman that said that if you took all the economists in the world and laid them end to end that it would be a very good idea. No wonder they call economics the dismal science. I just don't agree with the premise of the article or the analogy that the author uses.
I think your quotes are a bit mixed up. Truman said something to the effect of he wanted a one-handed economist because all of his economists said, "On the one hand...and on the other hand..." I think the quote you are seeking is from George Bernard Shaw which is something like if you laid all the economists from end to end, they still wouldn't reach a conclusion.

Edited to add: Another good one from Churchill, "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions."

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Re: An economist dismisses the idea of dollar cost averaging

Post by nedsaid » Sun Jan 07, 2018 1:34 pm

CppCoder wrote:
Sun Jan 07, 2018 1:30 pm
nedsaid wrote:
Sun Jan 07, 2018 12:33 pm
I think it was President Truman that said that if you took all the economists in the world and laid them end to end that it would be a very good idea. No wonder they call economics the dismal science. I just don't agree with the premise of the article or the analogy that the author uses.
I think your quotes are a bit mixed up. Truman said something to the effect of he wanted a one-handed economist because all of his economists said, "On the one hand...and on the other hand..." I think the quote you are seeking is from George Bernard Shaw which is something like if you laid all the economists from end to end, they still wouldn't reach a conclusion.
The on the one hand...and on the other hand is probably the most famous of Truman quotes. He said something like what we needed were one-armed economists. I have read a lot of things over the years in various publications, it is hard to keep it all straight. I did read the quote I cited above somewhere, it probably wasn't Truman but some smart aleck columnist.
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Re: An economist dismisses the idea of dollar cost averaging

Post by MindBogler » Sun Jan 07, 2018 1:36 pm

If you save $5500 over 12 months and invest in month 13 is this considered a lump sum? What if you DCA'd over those same 12 months? The problem with these scenarios is that the assumptions aren't clearly defined. Obviously in my case it is mental gymnastics to call the month 13 investment a lump sum. You've missed out on a year of growth that could occur during the preceding 12 months via periodic investment. Now if we're considering a case where an investor starts with $5500, perhaps via windfall, and would like to know whether they should lump sum or DCA that amount over 12 months, the answer is different. It isn't a true lump sum decision if the money to be invested had to be saved up over some period of time.

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Re: An economist dismisses the idea of dollar cost averaging

Post by Maverick3320 » Sun Jan 07, 2018 1:40 pm

I'm thoroughly convinced that you can find at least one economist who agrees with just about any viewpoint.

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Re: An economist dismisses the idea of dollar cost averaging

Post by cfs » Sun Jan 07, 2018 1:48 pm

In this forum we have a good number of investors holding "two-comma portfolios" but they did not have a "two-comma amount" to start with. She is able to reach a large amount to do a lumper by adding little by little, unless she wins the super lotto or mega millions. She listens to Bob Brinker's Money Talk, and she knows that by consistently doing her DCA, one day she may reach the land of critical mass. Good luck with your investments [with or without DCA], and thanks for reading ~cfs~
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Re: An economist dismisses the idea of dollar cost averaging

Post by dbr » Sun Jan 07, 2018 1:52 pm

MindBogler wrote:
Sun Jan 07, 2018 1:36 pm
If you save $5500 over 12 months and invest in month 13 is this considered a lump sum? What if you DCA'd over those same 12 months? The problem with these scenarios is that the assumptions aren't clearly defined. Obviously in my case it is mental gymnastics to call the month 13 investment a lump sum. You've missed out on a year of growth that could occur during the preceding 12 months via periodic investment. Now if we're considering a case where an investor starts with $5500, perhaps via windfall, and would like to know whether they should lump sum or DCA that amount over 12 months, the answer is different. It isn't a true lump sum decision if the money to be invested had to be saved up over some period of time.
You can create different scenarios. The usual one is someone who has money that is not invested and wants to know if you can invest it now (lump sum) or in pieces over a period of time (DCA). The possibility that one would save the money and invest after some amount has accumulated is a variation on lump sum, one would suppose.

In any case it is always true that the answer on average is that the more money you have in the market the longer, the more return one can expect. This is patently obvious and only obscured by the fact that investment returns are variable and the actual result in a period can be quite different from the expected, aka average, result. That is why people come up with this silly it is better to lump sum 2/3 of the time. If one wants to play mental gymnastics we could even claim that just being invested is investing a lump sum every day, and that comes out better 2/3 of the time. That comment is not actually at all silly nor is it silly to point out that if DCA is a good idea, then every investor should periodically liquidate all his holdings and DCA them back into the market. We can then have a rip-roaring discussion regarding the optimum timing for this cycle.

Finally, a reminder is that the origin of the term DCA was for the choice between investing a fixed dollar amount in shares every period compared to investing in a fixed number of shares every period. It is a mathematical fact that this type of DCA ensures investing at a lower average share price than the other. That may be the reason people even think to ask about DCA, due to this holdover from when stocks were bought in round lots rather than that people could invest dollar amounts in mutual funds.

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Re: An economist dismisses the idea of dollar cost averaging

Post by dbr » Sun Jan 07, 2018 1:54 pm

cfs wrote:
Sun Jan 07, 2018 1:48 pm
In this forum we have a good number of investors holding "two-comma portfolios" but they did not have a "two-comma amount" to start with. She is able to reach a large amount to do a lumper by adding little by little, unless she wins the super lotto or mega millions. She listens to Bob Brinker's Money Talk, and she knows that by consistently doing her DCA, one day she may reach the land of critical mass. Good luck with your investments [with or without DCA], and thanks for reading ~cfs~
Periodically investing money when it becomes available is most definitely NOT what is being asked in the usual conversation here about lump sum vs DCA. It IS very close to what used to be the concept when the question was should one invest a fixed dollar amount every period or invest in a fixed number of shares every period.

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Re: An economist dismisses the idea of dollar cost averaging

Post by Agggm » Sun Jan 07, 2018 2:07 pm

blgaarder wrote:
Sun Jan 07, 2018 11:51 am
I was reading the revised version of Steven Landsburg's The Armchair Economist and found chapter 19 to be interesting.

Beginning on page 237, he looks at dollar cost averaging.

An excerpt:

"Having money in the stock market for 10 months is like betting on the spins of 10 roulette wheels. If you dollar-cost average, adding $1,000 to your investment each month, then you have $1,000 riding on the first spin, $2,000 on the second, $3,000 on the third, an so on. But we've just agreed that this is a great mistake. The wise gambler bets $5,500 on each wheel. In terms of investment strategy, this means that you should invest $5,500 the first month; then adjust your holdings up or down as necessary so that your stock is always worth $5,500. (If the value falls to $5,000, invest another $500; if it rises to $6,000, sell $500 worth of stock.)"

That was based on the random walk theory, he talks about DCA in the non-random walk situation.

Please read the chapter before responding.

He dumps on Bob Brinker of Moneytalks.
Ideal fiction:
I would have preferred to have the APV of my investable future earnings (discounting vector set at my raises rates) given to me day 1 of my career and put it into my AA and never add another new penny.

Unfortunate reality:
DCA is how I've had to invest.

Math:
At the limit, DCA'd contributions don't matter.

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Re: An economist dismisses the idea of dollar cost averaging

Post by cfs » Sun Jan 07, 2018 2:28 pm

dbr wrote:
Sun Jan 07, 2018 1:54 pm
cfs wrote:
Sun Jan 07, 2018 1:48 pm
In this forum we have a good number of investors holding "two-comma portfolios" but they did not have a "two-comma amount" to start with. She is able to reach a large amount to do a lumper by adding little by little, unless she wins the super lotto or mega millions. She listens to Bob Brinker's Money Talk, and she knows that by consistently doing her DCA, one day she may reach the land of critical mass. Good luck with your investments [with or without DCA], and thanks for reading ~cfs~
Periodically investing money when it becomes available is most definitely NOT what is being asked in the usual conversation here about lump sum vs DCA. It IS very close to what used to be the concept when the question was should one invest a fixed dollar amount every period or invest in a fixed number of shares every period.
Thanks for the note, and thanks for reading ~cfs~
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Re: An economist dismisses the idea of dollar cost averaging

Post by TG2 » Sun Jan 07, 2018 3:17 pm

JakeyLee wrote:
Sun Jan 07, 2018 12:35 pm
I read the book, and would recommend to folks who like all perspectives of finance, investing, etc.. On the surface I believe we all agree that lump sum investing makes more sense. Back testing seems to "prove" such a theory. However, most Americans begin their investment journey with their 401ks. They simply don't have means or capacity to dump in the max in January. Not in the beginning of their careers anyway. Years go by, they buy with each paycheck, and maybe even figure out a way to max it out. They wake up one day, looking at their balance, and feel proud/accomplished with what dollars cost averaging has done for them. Rinse repeat. Confirmation bias? Maybe a little. But I certainly don't think most "dollar cost average" because they believe it is most the most efficient way to invest. They do it because they "believe" they have no other choice.
Which is why I always differentiate between the effect of DCA and the philosophy of DCA. One cannot really be said to be using DCA if they are investing as much as they can each time. The effect works out the same way though. As I put in another thread previously:
(T)here is a difference between the EFFECT of dollar-cost averaging and the PHILOSOPHY of dollar-cost averaging. Making regular deferrals to a 401k results in DCA over time, but is more properly called periodic investing or something like that. The money is invested as it becomes available, but there is no conscious choice to use DCA. That is just the way it works. True DCA is when one has the money available to invest at one time but chooses instead to invest over time.

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Re: An economist dismisses the idea of dollar cost averaging

Post by dbr » Sun Jan 07, 2018 3:24 pm

TG2 wrote:
Sun Jan 07, 2018 3:17 pm
JakeyLee wrote:
Sun Jan 07, 2018 12:35 pm
I read the book, and would recommend to folks who like all perspectives of finance, investing, etc.. On the surface I believe we all agree that lump sum investing makes more sense. Back testing seems to "prove" such a theory. However, most Americans begin their investment journey with their 401ks. They simply don't have means or capacity to dump in the max in January. Not in the beginning of their careers anyway. Years go by, they buy with each paycheck, and maybe even figure out a way to max it out. They wake up one day, looking at their balance, and feel proud/accomplished with what dollars cost averaging has done for them. Rinse repeat. Confirmation bias? Maybe a little. But I certainly don't think most "dollar cost average" because they believe it is most the most efficient way to invest. They do it because they "believe" they have no other choice.
Which is why I always differentiate between the effect of DCA and the philosophy of DCA. One cannot really be said to be using DCA if they are investing as much as they can each time. The effect works out the same way though. As I put in another thread previously:
(T)here is a difference between the EFFECT of dollar-cost averaging and the PHILOSOPHY of dollar-cost averaging. Making regular deferrals to a 401k results in DCA over time, but is more properly called periodic investing or something like that. The money is invested as it becomes available, but there is no conscious choice to use DCA. That is just the way it works. True DCA is when one has the money available to invest at one time but chooses instead to invest over time.
The effect does not work out the same because in one case there is less money to invest but it is all invested at maximum return and in the other case there is more money to invest but some of it is intentionally held at low return. Of course, logically we could consider the case of a person having a lump sum and DCA'ing that from a more risky higher returning investment to a lower returning one. With no more thought given to that proposition than is usually given to the usual proposition one could ask the same questions. After all, would DCA not reduce the regret that the higher returning investment one is leaving might suddenly have a very large gain and one would hate to have missed it?

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Re: An economist dismisses the idea of dollar cost averaging

Post by TG2 » Sun Jan 07, 2018 3:46 pm

When I said the effect works out the same I was referring to buying more shares at lower prices and fewer shares at higher prices, such as happens with 401k deferrals. That is effectively dollar-cost averaging even if there was no conscious choice to utilize DCA as an investment strategy. It is simply periodic investing. I am a big believer in lump-sum. True DCA (investing over time by choice rather than circumstance) is merely an attempt to mitigate risk for inexperienced or less confident investors.

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Re: An economist dismisses the idea of dollar cost averaging

Post by North Texas Cajun » Sun Jan 07, 2018 4:03 pm

TG2 wrote:
Sun Jan 07, 2018 3:17 pm

Which is why I always differentiate between the effect of DCA and the philosophy of DCA. One cannot really be said to be using DCA if they are investing as much as they can each time. The effect works out the same way though. As I put in another thread previously:
(T)here is a difference between the EFFECT of dollar-cost averaging and the PHILOSOPHY of dollar-cost averaging. Making regular deferrals to a 401k results in DCA over time, but is more properly called periodic investing or something like that. The money is invested as it becomes available, but there is no conscious choice to use DCA. That is just the way it works. True DCA is when one has the money available to invest at one time but chooses instead to invest over time.
I agree completely if we are referring to equity investment.

It is almost certain that the total stock market will yield positive returns over the long run. Further, it is very likely that only a few days over the long run will account for the lion’s share of that total return. It is highly unlikely that one can predict when those few days will occur. (ie. Attempting to time the market will reduce overall returns.) So the sensible strategy is to invest any funds immediately in equities as soon as they become available for investment.

Of course, since most investors accumulate investable funds periodically, adhering to the immediate investment strategy means that funds are invested periodically. Investing funds periodically ensures that one will dollar cost average.

So, in fact, most investors accomplish both strategies. By design they invest up front as soon as funds become available. Unintentionally, they also dollar cost average.

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Re: An economist dismisses the idea of dollar cost averaging

Post by Sandtrap » Sun Jan 07, 2018 4:20 pm

blgaarder wrote:
Sun Jan 07, 2018 11:51 am
I was reading the revised version of Steven Landsburg's The Armchair Economist and found chapter 19 to be interesting.

Beginning on page 237, he looks at dollar cost averaging.

An excerpt:

"Having money in the stock market for 10 months is like betting on the spins of 10 roulette wheels. If you dollar-cost average, adding $1,000 to your investment each month, then you have $1,000 riding on the first spin, $2,000 on the second, $3,000 on the third, an so on. But we've just agreed that this is a great mistake. The wise gambler bets $5,500 on each wheel. In terms of investment strategy, this means that you should invest $5,500 the first month; then adjust your holdings up or down as necessary so that your stock is always worth $5,500. (If the value falls to $5,000, invest another $500; if it rises to $6,000, sell $500 worth of stock.)"

That was based on the random walk theory, he talks about DCA in the non-random walk situation.

Please read the chapter before responding.

He dumps on Bob Brinker of Moneytalks.
Is it possible to edit your original post and insert the link to the "chapter"?
thanks,
j

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Re: An economist dismisses the idea of dollar cost averaging

Post by North Texas Cajun » Sun Jan 07, 2018 4:33 pm

TG2 wrote:
Sun Jan 07, 2018 3:46 pm
True DCA (investing over time by choice rather than circumstance) is merely an attempt to mitigate risk for inexperienced or less confident investors.
I disagree with part of this statement. IMO, there is no such thing as “true dollar cost averaging”. DCA is a result. It can be obtained by at least two strategies, as we agreed before:

1. Holding back some part of an investable lump sum so as to make periodic investments;

2. Investing inmediately a fixed amount or percentage of one’s income as that income is acquired.

I think it is incorrect to declare that strategy 1 is “true dollar cost averaging”. As I see it, both strategies achieve a true DCA result. But strategy 1 is market-timing and strategy 2 is not.

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Re: An economist dismisses the idea of dollar cost averaging

Post by TG2 » Sun Jan 07, 2018 5:22 pm

North Texas Cajun wrote:
Sun Jan 07, 2018 4:33 pm
TG2 wrote:
Sun Jan 07, 2018 3:46 pm
True DCA (investing over time by choice rather than circumstance) is merely an attempt to mitigate risk for inexperienced or less confident investors.
I disagree with part of this statement. IMO, there is no such thing as “true dollar cost averaging”. DCA is a result. It can be obtained by at least two strategies, as we agreed before:

1. Holding back some part of an investable lump sum so as to make periodic investments;

2. Investing inmediately a fixed amount or percentage of one’s income as that income is acquired.

I think it is incorrect to declare that strategy 1 is “true dollar cost averaging”. As I see it, both strategies achieve a true DCA result. But strategy 1 is market-timing and strategy 2 is not.
Again, though, it is a difference between the result of DCA and the strategy of it. DCA is actually both, which is where the problem arises. #1 is utilizing the strategy of DCA. #2 merely results in it, and is therefore irrelevant to any discussion of whether the competing strategies of lump-sum or DCA are better than the other.

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Kalo
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Re: An economist dismisses the idea of dollar cost averaging

Post by Kalo » Sun Jan 07, 2018 5:58 pm

I view it more like Schroedinger's cat. It is both a mistake to dca and a mistake not to. But you won't know which is true until time elapses, at which point you will know. Arguably, you are twice as likely to benefit from lump summing. But that fact will be cold comfort to the lump summer if the market crashes just after they buy in. Like telling someone they should have made out better and usually would have. But what's done is done.

So it is in part a matter of personal disposition, and possibly circumstances. For example, feelings about a recent inheritance, not wanting to dishonor the benefactor by making an unwise choice. And even if it is confusing outcome with strategy, it's still real money and real human feelings involved.

I've never been in a position to lump sum, but my gut tells me I would DCA over about a year or two depending on how the market felt to me at the time. I'm not an investing genius and don't care to try to be, but I will go with my gut if something feels risky to me.

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Re: An economist dismisses the idea of dollar cost averaging

Post by North Texas Cajun » Sun Jan 07, 2018 6:03 pm

TG2 wrote:
Sun Jan 07, 2018 5:22 pm
North Texas Cajun wrote:
Sun Jan 07, 2018 4:33 pm
TG2 wrote:
Sun Jan 07, 2018 3:46 pm
True DCA (investing over time by choice rather than circumstance) is merely an attempt to mitigate risk for inexperienced or less confident investors.
I disagree with part of this statement. IMO, there is no such thing as “true dollar cost averaging”. DCA is a result. It can be obtained by at least two strategies, as we agreed before:

1. Holding back some part of an investable lump sum so as to make periodic investments;

2. Investing inmediately a fixed amount or percentage of one’s income as that income is acquired.

I think it is incorrect to declare that strategy 1 is “true dollar cost averaging”. As I see it, both strategies achieve a true DCA result. But strategy 1 is market-timing and strategy 2 is not.
Again, though, it is a difference between the result of DCA and the strategy of it. DCA is actually both, which is where the problem arises. #1 is utilizing the strategy of DCA. #2 merely results in it, and is therefore irrelevant to any discussion of whether the competing strategies of lump-sum or DCA are better than the other.
I still disagree. The DCA strategy you are calling “true DCA” is only one strategy in which an investor intends to achieve dollar cost averagng. And the strategy is not actually to dollar cost average. The strategy is to withhold investment and invest periodically in order to achieve dollar cost averaging.

I believe that historically DCA referred to a desired result. Younger investors and economists have attempted to redefine the term to mean only the strategy and not the result.

If you use Investopedia as your source, you would see that DCA refers to the result. If you use wikipedia as your source, you might believe that DCA is narrowly defined as the strategy you are referring to as “True DCA”.

Not meaning to get into an argument about semantics, but it does concern me when someone uses a term such as “True DCA”.

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Re: An economist dismisses the idea of dollar cost averaging

Post by TG2 » Sun Jan 07, 2018 6:57 pm

North Texas Cajun wrote:
Sun Jan 07, 2018 6:03 pm
TG2 wrote:
Sun Jan 07, 2018 5:22 pm
North Texas Cajun wrote:
Sun Jan 07, 2018 4:33 pm
TG2 wrote:
Sun Jan 07, 2018 3:46 pm
True DCA (investing over time by choice rather than circumstance) is merely an attempt to mitigate risk for inexperienced or less confident investors.
I disagree with part of this statement. IMO, there is no such thing as “true dollar cost averaging”. DCA is a result. It can be obtained by at least two strategies, as we agreed before:

1. Holding back some part of an investable lump sum so as to make periodic investments;

2. Investing inmediately a fixed amount or percentage of one’s income as that income is acquired.

I think it is incorrect to declare that strategy 1 is “true dollar cost averaging”. As I see it, both strategies achieve a true DCA result. But strategy 1 is market-timing and strategy 2 is not.
Again, though, it is a difference between the result of DCA and the strategy of it. DCA is actually both, which is where the problem arises. #1 is utilizing the strategy of DCA. #2 merely results in it, and is therefore irrelevant to any discussion of whether the competing strategies of lump-sum or DCA are better than the other.
I still disagree. The DCA strategy you are calling “true DCA” is only one strategy in which an investor intends to achieve dollar cost averagng. And the strategy is not actually to dollar cost average. The strategy is to withhold investment and invest periodically in order to achieve dollar cost averaging.

I believe that historically DCA referred to a desired result. Younger investors and economists have attempted to redefine the term to mean only the strategy and not the result.

If you use Investopedia as your source, you would see that DCA refers to the result. If you use wikipedia as your source, you might believe that DCA is narrowly defined as the strategy you are referring to as “True DCA”.

Not meaning to get into an argument about semantics, but it does concern me when someone uses a term such as “True DCA”.
But the disagreement is entirely about semantics. :D

And the same Investopedia page can be read to agree with my position. It says that, "Fundamental to the strategy is a commitment to investing a fixed dollar amount each month." And, "The real value of dollar-cost averaging is that investors don’t need to worry about investing at the top of the market or trying to determine when to get in or out of the market."

Merely investing money as it becomes available does not satisfy the commitment requirement. That is simply periodic investing. In addition, the second quote implies a choice. Their example also states a choice: "If the investor had invested all $5,000 on one of these days instead of spreading the investment across five months, the total profitability of the position would be higher or lower than $6,857.11 depending on the month chosen for the investment. However, no one can time the market. DCA is a safe strategy to ensure an overall favorable average price per share."

It is perhaps unfortunate that the term has become co-opted to mean both a strategy and a result, but that is exactly why I distinguish between the two. If you don't like the term "True DCA", fine. Use something else. I choose it because it covers both the strategy and its result.

Anyway, since we are basically only arguing semantics without much real disagreement, that is probably enough on this subject. lol

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Re: An economist dismisses the idea of dollar cost averaging

Post by Thesaints » Sun Jan 07, 2018 7:01 pm

The one true, incontrovertible, fact is that cost averaging reduces the volatility of returns, and in particular eliminates extreme tails of the distribution. This at the price of a reduction in the expected return.

Many detractors focus only on the second aspect and in doing that they are wrong.

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Re: An economist dismisses the idea of dollar cost averaging

Post by North Texas Cajun » Sun Jan 07, 2018 7:33 pm

Every argument I’ve read which criticizes dollar cost averaging uses the comparison of:

1. Investing a lump sum at the beginning of a number of years or months;

vs

2. Holding on to a portion of that lump sum and investing it in equal amounts over subsequent periods.

That’s not the way I saw dollar cost averaging proposed many years ago. The first comparison I saw was:

1. Buying a fixed number of shares periodically;

Vs

2. Buying a fixed dollar amount of shares periodically.

In that second comparison, it should be obvious that a DCA strategy is not a bad strategy.

In the real world, an investor is far more likely to have a periodic stream of investable funds than a large initial lump sum. There are exceptions, including life insurance proceeds or inheritance. But the periodic stream of funds is still far more common.

Those who automatically criticize DCA always seem to assume the choice is between investing a lump sum and holding back and investing periodically. Why is that?

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Re: An economist dismisses the idea of dollar cost averaging

Post by arcticpineapplecorp. » Sun Jan 07, 2018 7:49 pm

nedsaid wrote:
Sun Jan 07, 2018 1:34 pm
CppCoder wrote:
Sun Jan 07, 2018 1:30 pm
nedsaid wrote:
Sun Jan 07, 2018 12:33 pm
I think it was President Truman that said that if you took all the economists in the world and laid them end to end that it would be a very good idea. No wonder they call economics the dismal science. I just don't agree with the premise of the article or the analogy that the author uses.
I think your quotes are a bit mixed up. Truman said something to the effect of he wanted a one-handed economist because all of his economists said, "On the one hand...and on the other hand..." I think the quote you are seeking is from George Bernard Shaw which is something like if you laid all the economists from end to end, they still wouldn't reach a conclusion.
The on the one hand...and on the other hand is probably the most famous of Truman quotes. He said something like what we needed were one-armed economists. I have read a lot of things over the years in various publications, it is hard to keep it all straight. I did read the quote I cited above somewhere, it probably wasn't Truman but some smart aleck columnist.
George Bernard Shaw once said "If all the economists were laid end to end, they'd never reach a conclusion."

source: https://www.google.com/search?q=lay+all ... fox-b-1-ab

just took a course (free. I entered a contest and won) offered at Rick Van Ness's site Financinglife.com
https://academy.financinglife.org/courses/
https://academy.financinglife.org/cours ... es/3153391

And Rick drew a distinction between period investments and DCA. I always assumed investing from one's paycheck is DCA because you're investing the same amount each pay and at times you'll buy more shares, and other time, less. Rick indicated that Investing money when you get it (not lump sum but contributions when you get paid) is called periodic investing, not DCA. DCA would be taking a lump sum and dollar cost averaging in over a certain period of time instead of investing all at once.

So there's three terms, not two: DCA, lump sum and periodic investing and they're distinctly different from one another.
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Re: An economist dismisses the idea of dollar cost averaging

Post by dbr » Sun Jan 07, 2018 7:54 pm

arcticpineapplecorp. wrote:
Sun Jan 07, 2018 7:49 pm


And Rick drew a distinction between period investments and DCA. I always assumed investing from one's paycheck is DCA because you're investing the same amount each pay and at times you'll buy more shares, and other time, less. Rick indicated that Investing money when you get it (not lump sum but contributions when you get paid) is called periodic investing, not DCA. DCA would be taking a lump sum and dollar cost averaging in over a certain period of time instead of investing all at once.

So there's three terms, not two: DCA, lump sum and periodic investing and they're distinctly different from one another.
The original meaning of dollar cost averaging which really was averaging the cost of a share based on dollars invested was one of two ways of doing periodic investing. I am baffled as to who causes or why these terms morph.

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Re: An economist dismisses the idea of dollar cost averaging

Post by Arthur Digby Sellers » Sun Jan 07, 2018 8:27 pm

North Texas Cajun wrote:
Sun Jan 07, 2018 7:33 pm

In the real world, an investor is far more likely to have a periodic stream of investable funds than a large initial lump sum. There are exceptions, including life insurance proceeds or inheritance. But the periodic stream of funds is still far more common.

Those who automatically criticize DCA always seem to assume the choice is between investing a lump sum and holding back and investing periodically. Why is that?
Because discussing DCA when an investor has a periodic stream of funds is pointless and utterly uninteresting. Of course an investor who has a stream of funds should invest them the only way he can: periodically, as the funds are available. There is no other side to that argument.

The more interesting question is what an investor with a lump sum (be it a windfall, someone who has been out of the market who wants to get back in, etc.) should do. There, the options are to invest the whole lump sum (to the appropriate AA) or else DCA to the desired AA. There are two sides to that argument, but the DCA side is illogical (though there may be a psychological advantage to DCA’ing that some investors may think they need).

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Re: An economist dismisses the idea of dollar cost averaging

Post by dbr » Sun Jan 07, 2018 9:19 pm

Arthur Digby Sellers wrote:
Sun Jan 07, 2018 8:27 pm


Because discussing DCA when an investor has a periodic stream of funds is pointless and utterly uninteresting. Of course an investor who has a stream of funds should invest them the only way he can: periodically, as the funds are available. There is no other side to that argument.

It isn't entirely uninteresting as see here: https://www.investopedia.com/terms/d/do ... raging.asp

It is a distinction between buying in fixed dollar amount or buying in fixed numbers of shares. The latter is encouraged by the fact that it once was true that investing was mostly done in round lots of shares rather than dollar amounts of mutual funds.

I still think thae fact that once upon a time there was an actual rationale for this investment tactic somehow is what causes people to get mixed up and irrationally think there is a legitimate application of DCA in place of lump sum.

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Re: An economist dismisses the idea of dollar cost averaging

Post by DarkHelmetII » Sun Jan 07, 2018 9:28 pm

It's a trick to get around analysis paralysis.
For me personally this is a big one. DCA is a way to get over emotional / behavioral hurdles. I rationalize it to myself this way. If the market continues upward, at least I had started to put some of the money in at the "beginning". If the market tanks, well then I am getting some stocks at fire sale prices. Either way I "win."

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Re: An economist dismisses the idea of dollar cost averaging

Post by Earl Lemongrab » Mon Jan 08, 2018 2:36 pm

DarkHelmetII wrote:
Sun Jan 07, 2018 9:28 pm
For me personally this is a big one. DCA is a way to get over emotional / behavioral hurdles. I rationalize it to myself this way. If the market continues upward, at least I had started to put some of the money in at the "beginning". If the market tanks, well then I am getting some stocks at fire sale prices. Either way I "win."
Well that's a nice thought, but I bet the reality is less certain. People who DCA are at the core afraid of the market. If it starts tanking, I doubt most of those will keep up their DCA plan. Instead they'll freeze and wait for "things to stabilize" or other market-time jargon.
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Re: An economist dismisses the idea of dollar cost averaging

Post by blgaarder » Tue Jan 09, 2018 5:57 pm

I can't post a ink to the chapter because it is one of those physical books (or Kindle).

Here is an Amazon link
https://www.amazon.com/Armchair-Economi ... +economist

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Re: An economist dismisses the idea of dollar cost averaging

Post by ThrustVectoring » Tue Jan 09, 2018 6:01 pm

blgaarder wrote:
Sun Jan 07, 2018 11:51 am
I was reading the revised version of Steven Landsburg's The Armchair Economist and found chapter 19 to be interesting.

Beginning on page 237, he looks at dollar cost averaging.

An excerpt:

"Having money in the stock market for 10 months is like betting on the spins of 10 roulette wheels. If you dollar-cost average, adding $1,000 to your investment each month, then you have $1,000 riding on the first spin, $2,000 on the second, $3,000 on the third, an so on. But we've just agreed that this is a great mistake. The wise gambler bets $5,500 on each wheel. In terms of investment strategy, this means that you should invest $5,500 the first month; then adjust your holdings up or down as necessary so that your stock is always worth $5,500. (If the value falls to $5,000, invest another $500; if it rises to $6,000, sell $500 worth of stock.)"

That was based on the random walk theory, he talks about DCA in the non-random walk situation.

Please read the chapter before responding.

He dumps on Bob Brinker of Moneytalks.
The recommended alternative is pretty much equivalent to picking a more conservative asset allocation, immediately investing accordingly, and rebalancing.
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Re: An economist dismisses the idea of dollar cost averaging

Post by Thesaints » Tue Jan 09, 2018 6:20 pm

What's the equivalent allocation to investing 100% in stocks for 20 years, but purchasing assets during the initial 24 months in equal installments ?
It is "equivalent" in what ? Expected return ? Volatility ? Volatility tails ?

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Re: An economist dismisses the idea of dollar cost averaging

Post by ruralavalon » Tue Jan 09, 2018 6:37 pm

blgaarder wrote:
Sun Jan 07, 2018 11:51 am
I was reading the revised version of Steven Landsburg's The Armchair Economist and found chapter 19 to be interesting.

Beginning on page 237, he looks at dollar cost averaging.

An excerpt:

"Having money in the stock market for 10 months is like betting on the spins of 10 roulette wheels. If you dollar-cost average, adding $1,000 to your investment each month, then you have $1,000 riding on the first spin, $2,000 on the second, $3,000 on the third, an so on. But we've just agreed that this is a great mistake. The wise gambler bets $5,500 on each wheel. In terms of investment strategy, this means that you should invest $5,500 the first month; then adjust your holdings up or down as necessary so that your stock is always worth $5,500. (If the value falls to $5,000, invest another $500; if it rises to $6,000, sell $500 worth of stock.)"

That was based on the random walk theory, he talks about DCA in the non-random walk situation.

Please read the chapter before responding.

He dumps on Bob Brinker of Moneytalks.
I can't tell what he is talking about.

Is he talking about someone who has a large lump sum to invest, who invests it in stages rather than all at once?

Or is he talking about someone who invests a standard dollar amount out of their paycheck every pay period?

The term "dollar-cost averaging" is sometimes used for both situations, creating much confusion.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: An economist dismisses the idea of dollar cost averaging

Post by Thesaints » Tue Jan 09, 2018 6:49 pm

He is analyzing a 1 year long investment executed in a single act at the beginning, or through equal amounts every month. He assumes that once someone is fully invested at years end future results are the same, regardless of the execution method.

Then the author makes his observations about the roulette spins and concludes that investing $1,000 monthly is equivalent to invest $5,500 initially.
The problem is that investing $1,000 monthly, at years end one has invested $12,000 and his future return is the same as someone who had invested all $12,000 initially. The person who invested $5,500 initially instead still has $6,500 on the sidelines.

In other words, the author has matched risk during the year, but not future returns and in doing so deviates from the cost averaging target, which is to achieve the same invested capital, at a lower risk (in particular avoiding tails), at the price of a small reduction in return.

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Re: An economist dismisses the idea of dollar cost averaging

Post by Dead Man Walking » Tue Jan 09, 2018 8:10 pm

Thesaints wrote:
Sun Jan 07, 2018 7:01 pm
The one true, incontrovertible, fact is that cost averaging reduces the volatility of returns, and in particular eliminates extreme tails of the distribution. This at the price of a reduction in the expected return.

Many detractors focus only on the second aspect and in doing that they are wrong.
+1

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Re: An economist dismisses the idea of dollar cost averaging

Post by Toons » Tue Jan 09, 2018 8:58 pm

The wise investor will invest 10k {lump sum }in the total stock market .
leave it there for 30 years ,reinvesting the dividends and capital gains.
Time Not Timing :happy


The part about being in the stock market for "10 months"?
I am unable to wrap my brain around it. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: An economist dismisses the idea of dollar cost averaging

Post by amateurnovice » Tue Jan 09, 2018 9:14 pm

To me, DCA is to investing what modern monetary theory is to economics.

It's just another way to describe the how of the system rather than the effects of using the system while posing itself as an explanation of the system (or even being misunderstood as a means to describe the effects of the system).

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Re: An economist dismisses the idea of dollar cost averaging

Post by Earl Lemongrab » Tue Jan 09, 2018 9:22 pm

Dead Man Walking wrote:
Tue Jan 09, 2018 8:10 pm
Thesaints wrote:
Sun Jan 07, 2018 7:01 pm
The one true, incontrovertible, fact is that cost averaging reduces the volatility of returns, and in particular eliminates extreme tails of the distribution. This at the price of a reduction in the expected return.

Many detractors focus only on the second aspect and in doing that they are wrong.
+1
So one should be constantly selling parts of the portfolio to DCA back in? Isn't the reduction in volatility due mainly to a higher cash allocation, and lower stock?
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: An economist dismisses the idea of dollar cost averaging

Post by dbr » Tue Jan 09, 2018 9:32 pm

Earl Lemongrab wrote:
Tue Jan 09, 2018 9:22 pm
Dead Man Walking wrote:
Tue Jan 09, 2018 8:10 pm
Thesaints wrote:
Sun Jan 07, 2018 7:01 pm
The one true, incontrovertible, fact is that cost averaging reduces the volatility of returns, and in particular eliminates extreme tails of the distribution. This at the price of a reduction in the expected return.

Many detractors focus only on the second aspect and in doing that they are wrong.
+1
So one should be constantly selling parts of the portfolio to DCA back in? Isn't the reduction in volatility due mainly to a higher cash allocation, and lower stock?
Exactly. One would certainly hope that one does not ascribe to a tactic that which is a natural consequence of how one is allocated. That is why people who are asking about DCA are almost certainly really asking if they believe in their asset allocation, a question only they can answer.

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Re: An economist dismisses the idea of dollar cost averaging

Post by Thesaints » Tue Jan 09, 2018 10:00 pm

Earl Lemongrab wrote:
Tue Jan 09, 2018 9:22 pm
So one should be constantly selling parts of the portfolio to DCA back in? Isn't the reduction in volatility due mainly to a higher cash allocation, and lower stock?
No, it is because you invest at many different prices, instead of picking a single one.

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Re: An economist dismisses the idea of dollar cost averaging

Post by RRAAYY3 » Tue Jan 09, 2018 10:44 pm

1. Pick Us / Int’l allocation
2. Buy Admiral shares of total US / Int’l
3. Contribute accordingly as the funds deviate from that #1 allocation

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Re: An economist dismisses the idea of dollar cost averaging

Post by Earl Lemongrab » Wed Jan 10, 2018 11:40 am

Thesaints wrote:
Tue Jan 09, 2018 10:00 pm
Earl Lemongrab wrote:
Tue Jan 09, 2018 9:22 pm
So one should be constantly selling parts of the portfolio to DCA back in? Isn't the reduction in volatility due mainly to a higher cash allocation, and lower stock?
No, it is because you invest at many different prices, instead of picking a single one.
So that would be a good strategy all the time? Always be selling part of the portfolio to DCA? If not, why not?
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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