Dollar Cost Averaging

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
alloykat
Posts: 64
Joined: Thu Nov 24, 2016 12:02 pm

Dollar Cost Averaging

Post by alloykat » Tue Dec 27, 2016 10:19 am

If you have 100K to invest, would you invest all at once, in 10K increments daily or in 10K increments monthly to fully capitalize on the concept of dollar cost averaging? At what point does holding onto cash just to achieve dollar cost averaging detrimental because your money is not invested in the market?

Nummerkins
Posts: 226
Joined: Tue Jun 01, 2010 4:41 pm

Re: Dollar Cost Averaging

Post by Nummerkins » Tue Dec 27, 2016 10:25 am

Just put it all in at once.

Vanguard paper on the subject: https://pressroom.vanguard.com/nonindex ... raging.pdf

User avatar
bertilak
Posts: 5671
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Dollar Cost Averaging

Post by bertilak » Tue Dec 27, 2016 12:19 pm

alloykat wrote:At what point does holding onto cash just to achieve dollar cost averaging detrimental because your money is not invested in the market?

Immediately.

That is unless you are better at pricing things than the average of everybody else buying and selling on that day. You probably aren't. But, if so, your optimal strategy is not DCA, but is to pick WHICH stocks to buy and sell NOW.

Maybe you are at least better at judging risk. Again, probably not. But, if so, then DCA is inferior to actively choosing WHEN to buy and sell.

Maybe you think you know best what your personal optimal risk level is. Here you are probably right! But again, DCA is not the best way to incorporate that special knowledge -- that's what setting your personal AA (primarily equity vs. fixed income) is for.

Maybe you are unsure of all of the above. Then maybe DCA is right for you, with the proviso you can "cheat" by abandoning DCA if and when you feel more comfortable with investing. DCA is mathematically a mistake but only a minor one. Investing when you are not comfortable is probably a bigger mistake.

No one can tell you where you fit into all that.
Listen very carefully. I shall say this only once. (There! I've said it.)

livesoft
Posts: 56586
Joined: Thu Mar 01, 2007 8:00 pm

Re: Dollar Cost Averaging

Post by livesoft » Tue Dec 27, 2016 12:48 pm

The OP should really really really read the threads and wiki article linked in the search posted by dbr. Those links discuss the ranges of things to do, the ranges of emotions felt, and the probabilities of gains and losses. Without that deep-seated knowledge, I don't think one can just take random opinions of posters and do anything useful with those opinions.
This signature message sponsored by sscritic: Learn to fish.

alloykat
Posts: 64
Joined: Thu Nov 24, 2016 12:02 pm

Re: Dollar Cost Averaging

Post by alloykat » Tue Dec 27, 2016 1:32 pm

Thanks. I read the threads. T

alloykat
Posts: 64
Joined: Thu Nov 24, 2016 12:02 pm

Re: Dollar Cost Averaging

Post by alloykat » Tue Dec 27, 2016 1:34 pm

Funny thing is I called Vanguard Flagship this morning and asked this question and the rep on the line was not sure. I wish she had just directed me to the Vanguard article.

dbr
Posts: 23722
Joined: Sun Mar 04, 2007 9:50 am

Re: Dollar Cost Averaging

Post by dbr » Tue Dec 27, 2016 1:39 pm

alloykat wrote:Thanks. I read the threads. T


Then what question remains that could be resolved for you?

Saphomd
Posts: 165
Joined: Tue Apr 03, 2012 6:11 pm
Location: SF, CA

Re: Dollar Cost Averaging

Post by Saphomd » Tue Dec 27, 2016 1:56 pm

There are many people who are more comfortable investing a little at a time (DCA). I personally DCA into my Vanguard Index funds every month . I feel comfortable doing it this way. However, there have been some studies where lump-sum investing has provided better returns than DCA. If anyone has any information on these "better returns", please share.

dbr
Posts: 23722
Joined: Sun Mar 04, 2007 9:50 am

Re: Dollar Cost Averaging

Post by dbr » Tue Dec 27, 2016 2:13 pm

Saphomd wrote:There are many people who are more comfortable investing a little at a time (DCA). I personally DCA into my Vanguard Index funds every month . I feel comfortable doing it this way. However, there have been some studies where lump-sum investing has provided better returns than DCA. If anyone has any information on these "better returns", please share.


You could read the Vanguard paper referenced above.

Also, a person only acquiring money on a regular basis does not have a lump sum available to make a decision about. It has not been proposed that people save up a lot of money for a long time and then invest it as opposed to investing the money when it is available, such as monthly savings. There are people who come into a large lump, such as by selling a business, inheriting money, or getting an insurance settlement. That would be the context for this question in most cases. On average time in the market produces higher return and volatility works out for the investor who delays less than half the time.

Actually the whole thing is a miss-application of the original use of the term. Originally the difference would have been between someone buying a fixed number of shares on a regular basis, but at a variable cost and someone investing a fixed amount of money on a regular basis but for a variable number of shares. It is simple arithmetic to show that dollar cost averaging in the second sense produces a higher return than fixed lot investing. This was relevant before mutual funds and when shares usually traded in round lots.

livesoft
Posts: 56586
Joined: Thu Mar 01, 2007 8:00 pm

Re: Dollar Cost Averaging

Post by livesoft » Tue Dec 27, 2016 2:56 pm

If I only had $50K to my name and got $100K to invest, I would probably do something different than if I had $10 million and got $100K to invest.
This signature message sponsored by sscritic: Learn to fish.

dbr
Posts: 23722
Joined: Sun Mar 04, 2007 9:50 am

Re: Dollar Cost Averaging

Post by dbr » Tue Dec 27, 2016 2:58 pm

livesoft wrote:If I only had $50K to my name and got $100K to invest, I would probably do something different than if I had $10 million and got $100K to invest.


It would probably start with taking some time to consider options and understand what is at issue. In my opinion most questions about DCA are really issues with taking risk. Some questions are a misunderstanding that there is some magic process for increasing return. If the latter were true, we would all sell everything periodically and DCA back in.

alloykat
Posts: 64
Joined: Thu Nov 24, 2016 12:02 pm

Re: Dollar Cost Averaging

Post by alloykat » Tue Dec 27, 2016 3:44 pm

I am most certainly not risk averse. I know a few FAs who when given a lump sum of money will put it into a Money Market fund and slowly put it into the market or sometimes just leave it in the Money Market indefinitely. This did not make any sense to me because I don't think people expect a FA to keep some sort of emergency fund for them as each person should be doing that on his/her own. I wanted to ensure that there was not some finer point to DCA that I was missing. I max out my 401K every January and dump into the market religiously throughout the year myself.

dbr
Posts: 23722
Joined: Sun Mar 04, 2007 9:50 am

Re: Dollar Cost Averaging

Post by dbr » Tue Dec 27, 2016 5:31 pm

alloykat wrote:I am most certainly not risk averse. I know a few FAs who when given a lump sum of money will put it into a Money Market fund and slowly put it into the market or sometimes just leave it in the Money Market indefinitely.


That is flat out bizarre.

livesoft
Posts: 56586
Joined: Thu Mar 01, 2007 8:00 pm

Re: Dollar Cost Averaging

Post by livesoft » Tue Dec 27, 2016 5:35 pm

^I don't find it bizarre. Those FAs may know what it takes to retain clients. :)
This signature message sponsored by sscritic: Learn to fish.

Saphomd
Posts: 165
Joined: Tue Apr 03, 2012 6:11 pm
Location: SF, CA

Re: Dollar Cost Averaging

Post by Saphomd » Tue Dec 27, 2016 5:36 pm

Good Vanguard link posted earlier.

Thank you. 8-)

alloykat
Posts: 64
Joined: Thu Nov 24, 2016 12:02 pm

Re: Dollar Cost Averaging

Post by alloykat » Tue Dec 27, 2016 9:15 pm

livesoft wrote:^I don't find it bizarre. Those FAs may know what it takes to retain clients. :)


HAHA!!

That Vanguard link is great! I agree.

User avatar
BolderBoy
Posts: 3400
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Dollar Cost Averaging

Post by BolderBoy » Wed Dec 28, 2016 12:15 am

alloykat wrote:If you have 100K to invest, would you invest all at once, in 10K increments daily or in 10K increments monthly to fully capitalize on the concept of dollar cost averaging? At what point does holding onto cash just to achieve dollar cost averaging detrimental because your money is not invested in the market?

It's a fair question and the VG research folks have done some modeling about it. Turns out that if you choose to DCA, it is best to get it all invested within 12 months.
“Where you stand, depends on where you sit” - Rufus Miles | "Never underestimate one's capacity to overestimate one's abilities"

User avatar
hollowcave2
Posts: 1790
Joined: Thu Mar 01, 2007 3:22 pm
Location: Sacramento, CA

Re: Dollar Cost Averaging

Post by hollowcave2 » Wed Dec 28, 2016 12:28 am

I would read the article in the Bogleheads Wiki about DCA before doing anything.

If you feel comfortable investing all $100K tomorrow at all time market highs, you have more mojo than me.
I get a kick out of the comments, "yeah, just put in." But it's your money and your sleep at risk. Make your own decision based on your goals and risk tolerance.

Lump sum works best with other people's money.

Talking about returns is a bit of a red herring when it comes to DCA. It is NOT a goal of DCA to maximize returns. The goal of DCA is to get you started with investing, regardless of market conditions. Also, getting some sleep is a nice little benefit.

BTW, lump sum also does not guarantee maximum returns either. Investors can cite studies where LS beats DCA most of the time, but it is not a guarantee at all. Also, the markets can get volatile and LS requires you to just ride with it. If you can accept these uncertainties, then perhaps LS is best for you.

But if you find yourself agonizing about this decision, asking for reassurance, and losing sleep over it, then DCA is designed to get you over the hump and get investing. So just get investing, one way or the other.

Good luck.

Steve

Post Reply