Reasonable timeframe to 'average in' to index funds?

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alex123711
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Reasonable timeframe to 'average in' to index funds?

Post by alex123711 » Fri Mar 29, 2019 7:16 pm

If the best option is by averaging into the index is to dollar cost average over a long period, what is a reasonable time frame to do this, if one was mostly holding cash.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by willthrill81 » Fri Mar 29, 2019 7:19 pm

alex123711 wrote:
Fri Mar 29, 2019 7:16 pm
If the best option is by averaging into the index is to dollar cost average over a long period, what is a reasonable time frame to do this, if one was mostly holding cash.
A purely passive approach would be to invest it all right now. The math says that historically, this would have been preferable, on average, to dollar cost averaging into the market over something like a year by a 2 to 1 margin. The only real reason not to lump sum invest your cash is because you don't want to later experience emotional regret for having happened to make the invest right before the market went down, even though that is obviously unknowable in advance.
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Re: Reasonable timeframe to 'average in' to index funds?

Post by FrugalInvestor » Fri Mar 29, 2019 7:27 pm

Since the market generally rises over time it's usually better to invest the lump sum all at once - the sooner the better. If that's going to bother you psychologically then dollar cost average over a year or less. The important thing is to get the money invested. Make your decision and then do it.
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Re: Reasonable timeframe to 'average in' to index funds?

Post by Phineas J. Whoopee » Fri Mar 29, 2019 9:05 pm

What do you want to maximize, and at what probability? The answer to that question will answer the one you asked.
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Re: Reasonable timeframe to 'average in' to index funds?

Post by CyclingDuo » Fri Mar 29, 2019 9:59 pm

alex123711 wrote:
Fri Mar 29, 2019 7:16 pm
If the best option is by averaging into the index is to dollar cost average over a long period, what is a reasonable time frame to do this, if one was mostly holding cash.
Every month into your 401k for 35-45 years during your working career. :beer
Last edited by CyclingDuo on Fri Mar 29, 2019 10:00 pm, edited 1 time in total.
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Re: Reasonable timeframe to 'average in' to index funds?

Post by mega317 » Fri Mar 29, 2019 10:00 pm

alex123711 wrote:
Fri Mar 29, 2019 7:16 pm
If the best option is by averaging into the index is to dollar cost average over a long period
Where did you get this idea, and what do you mean by best?

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Re: Reasonable timeframe to 'average in' to index funds?

Post by Dale_G » Sat Mar 30, 2019 12:29 am

It is Friday evening now. Place your order now and you will be invested at the end of the day on Monday. Three days lost, you should have invested before the close of the market today.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by JustinR » Sat Mar 30, 2019 12:58 am

alex123711 wrote:
Fri Mar 29, 2019 7:16 pm
If the best option is by averaging into the index is to dollar cost average over a long period, what is a reasonable time frame to do this, if one was mostly holding cash.
That's not the best option...you were misinformed.

The best option is to invest all of your investment money as soon as possible.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by The Wizard » Sat Mar 30, 2019 6:28 am

I like to buy on the dips and certainly not at all time market highs.
Fortunately, we're not at an all-time high...
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Re: Reasonable timeframe to 'average in' to index funds?

Post by Shallowpockets » Sat Mar 30, 2019 6:57 am

If you invest lump sum you are one and done. Otherwise you are looking for dips or having to take action to buy specific timeframes.
Another benefit on lumo sum is you have one cost basis figure. You know your cost for that X purchase and the waters are not muddied when you look at your investment.
Here is an alternate way to do it. Take half your dollars and do a lump sum. Then split the remainder over the next year (or whatever timeframe you decide) and track how they do against each other.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by willthrill81 » Sat Mar 30, 2019 11:20 am

The Wizard wrote:
Sat Mar 30, 2019 6:28 am
I like to buy on the dips and certainly not at all time market highs.
In that light, this post from 2016 seems interesting.
AlohaJoe wrote:
Wed Aug 03, 2016 1:18 am
Based on monthly numbers, the S&P 500 has spent 31.9% of its life within 5% of its (up to then) all time high.

It has spent 23.9% of its life within 2% of its (up to then) all time high.

It has spent 15.7% of its life at a new all time high.
You would certainly be limiting your ability to buy stocks if you didn't buy at or near all time highs.
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Re: Reasonable timeframe to 'average in' to index funds?

Post by livesoft » Sat Mar 30, 2019 11:25 am

I usually suggest:

50% now.
5% of the total every month for the next 10 months, but ...
Any day that the stock market drops like it did March 22nd or March 7th or many of those days in December 2018, then invest another 5%.

That way, one will be fully invested in 10 months or less. And it is usually less because there will be a few of those one-day drops.
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Re: Reasonable timeframe to 'average in' to index funds?

Post by Kenkat » Sat Mar 30, 2019 12:05 pm

Statistically, the best time is 100% right now.

If you are however worried about the angst that could occur if you put it all in now and the market takes a giant plunge next week, I think you could also average it in over the next 12-18 months.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by Island John » Sat Mar 30, 2019 12:46 pm

I recognize that as a passive, long-term investor, the conventional wisdom is that there isn't any advantage to dollar cost averaging into the market and that there is no "better time" to invest. However, I'm wondering if this approach applies in all cases.

Can anyone here point me to any research showing that current market valuations (e.g. CAPE) don't have any effect on the long term success of a lump sum investment approach vs a dollar cost average approach?

For example, the current CAPE for the U.S. market is is 29.8, while the CAPE for Emerging Markets is 15.7. If I have a diversified portfolio with both a US allocation and an Emerging Markets allocation, I might be OK with lump summing into Emerging Markets while I might be a little more cautious about lump summing in the US Market, and go with a dollar cost averaging approach in that segment. I recognize that this is market timing, but it seems different to me since we're talking about the investment entry point.

Just wondering if anyone can point to any research that's been done from this perspective.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by willthrill81 » Sat Mar 30, 2019 12:51 pm

Island John wrote:
Sat Mar 30, 2019 12:46 pm
I recognize that as a passive, long-term investor, the conventional wisdom is that there isn't any advantage to dollar cost averaging into the market and that there is no "better time" to invest. However, I'm wondering if this approach applies in all cases.

Can anyone here point me to any research showing that current market valuations (e.g. CAPE) don't have any effect on the long term success of a lump sum investment approach vs a dollar cost average approach?

For example, the current CAPE for the U.S. market is is 29.8, while the CAPE for Emerging Markets is 15.7. If I have a diversified portfolio with both a US allocation and an Emerging Markets allocation, I might be OK with lump summing into Emerging Markets while I might be a little more cautious about lump summing in the US Market, and go with a dollar cost averaging approach in that segment. I recognize that this is market timing, but it seems different to me since we're talking about the investment entry point.

Just wondering if anyone can point to any research that's been done from this perspective.
Valuations have been 'high' for the U.S. since 1992, but real returns from then until now have been above their historic average. That's from a 30,000 foot perspective and certainly no guarantee of the future, but other evidence has shown that using valuations as a market timing tool has been a terrible strategy because valuations have not been reliably mean-reverting.

I've not seen any compelling evidence that using valuations in the accumulation phase has led to reliably better results than ignoring them altogether. However, they appear to be useful in the decumulation (aka withdrawal) phase.
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Re: Reasonable timeframe to 'average in' to index funds?

Post by vineviz » Sat Mar 30, 2019 12:54 pm

Island John wrote:
Sat Mar 30, 2019 12:46 pm
I recognize that as a passive, long-term investor, the conventional wisdom is that there isn't any advantage to dollar cost averaging into the market and that there is no "better time" to invest. However, I'm wondering if this approach applies in all cases.
Lump sum investing doesn't work in all cases, but it is always the best approach.

There is no way to know which strategy worked best or will work best, DCA or lump sum, without the benefit of hindsight. But the odds ALWAYS favor lump sum, regardless of CAPE or market sentiment or tea leaves.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Reasonable timeframe to 'average in' to index funds?

Post by willthrill81 » Sat Mar 30, 2019 1:04 pm

vineviz wrote:
Sat Mar 30, 2019 12:54 pm
Island John wrote:
Sat Mar 30, 2019 12:46 pm
I recognize that as a passive, long-term investor, the conventional wisdom is that there isn't any advantage to dollar cost averaging into the market and that there is no "better time" to invest. However, I'm wondering if this approach applies in all cases.
Lump sum investing doesn't work in all cases, but it is always the best approach.

There is no way to know which strategy worked best or will work best, DCA or lump sum, without the benefit of hindsight. But the odds ALWAYS favor lump sum, regardless of CAPE or market sentiment or tea leaves.
Well said.

In many areas of life, but especially in the arena of investing, people far too often confuse the best strategy with the best results. For instance, if you have a fair, six-sided die and would win if anything smaller than a five is rolled (and losses would be equal in size to wins), then the best strategy is to keep playing as long as you can. Over the long-term, you can expect to lose one-third of the time, but you can expect to win two-thirds of the time. For the same reason, this is why real gambling is always a bad strategy because the odds are virtually always against you. Yes, someone will win the lottery or jackpot, but the expected value of your participation is negative (ignoring the seemingly rare instances where the odds are actually in your favor).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Reasonable timeframe to 'average in' to index funds?

Post by CABob » Sat Mar 30, 2019 1:07 pm

Perhaps the potential emotional impact depends on how large the lump sum is. As a suggestion perhaps if the lump sum represents 10% or less of your total investment I think one could comfortably invest all in a single chunk. If it represents a large percentage of the total I understand the reluctance or worry and perhaps a DCA is warranted. If so I would suggest that the time frame be 12 months with 1/12 invested monthly or 1/4 invested quarterly. My 10% figure could probably be adjusted up or down based on the individual or circumstances.
Bob

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Re: Reasonable timeframe to 'average in' to index funds?

Post by columbia » Sun Mar 31, 2019 12:37 pm


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Re: Reasonable timeframe to 'average in' to index funds?

Post by iamlucky13 » Mon Apr 01, 2019 2:20 am

While the research indicates that historically, 2/3 of the time you would have been better off investing all of it right away, given the currently high PE of most of the market, I wasn't able to convince myself to re-invest everything right away when I rolled a 401K representing a little over half my tax-advantaged accounts into an IRA. That was bad reasoning, in my opinion (in my case, I was already invested before the rollover, not holding cash, and should have gone back to the same allocation ASAP), but the time between initiating the rollover and the money actually being available to reinvest allowed some significant market swings that led me to overthink returning my cash to its prior allocation.

I did half right away (so a little over 1/4 of my tax-advantaged accounts), and intended to dollar cost average quarterly over the following year. Work and family life both got busy and I'm actually behind schedule on finishing it.

I haven't revisited how that is working so far in detail. I think I missed about 2% in gains, although the swings both directions in the interim were much larger.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by Island John » Mon Apr 01, 2019 11:42 pm

When I posted to this thread a couple of days ago, I was asking if anyone knew of any research showing whether a lump sum or dollar cost average approach performed better during periods of high valuations.

Several people pointed out that lump sum investing is generally the better approach, which I agree with, but I didn’t see anyone address my specific question about research that looked at lump sum vs dollar cost average during periods of high valuations.

With a quick Google search (which I should have done in the first place) I found this article in which the author compared lump sum investing to dollar cost averaging during periods when the CAPE was 32 or higher.

https://awealthofcommonsense.com/2018/0 ... -decision/

According to the author, Ben Carlson, during the periods when the CAPE ratio was 32 or higher, the lump sum approach performed better 60% of the time in his backtesting. However, the lump sum approach also led to a wider range of outcomes with some outcomes better and some worse than the dollar cost average approach.

(Edited to add) the article also notes that over a 36 month interval, the lump sum beat the dollar cost averaging approach 90 percent of the time.

Since I had raised the question, I thought I would share what I found.
Last edited by Island John on Tue Apr 02, 2019 12:17 am, edited 1 time in total.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by CurlyDave » Tue Apr 02, 2019 12:15 am

I think that it is just plain wrong to consider moving a large sum of money in another investment over a long period of time as "Dollar Cost Averaging".

DCA is really best used to describe setting aside a fixed amount of money from an income stream, such as a paycheck.

If you have a large lump sum of cash, you already have it invested in whatever account you are holding it in. This is true whether you have in in a checking account, a savings account or in $100s in your safe. When people talk about Dollar Cost Averaging this into stocks, what they really mean is that you are slowly adjusting your asset allocation over time. This is commonly called rebalancing.

The distinction is important. while it is perfectly reasonable to rebalance in one big adjustment, or in two or three smaller increments, it is not really reasonable to rebalance over the course of a year.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by Earl Lemongrab » Tue Apr 02, 2019 2:29 pm

CurlyDave wrote:
Tue Apr 02, 2019 12:15 am
I think that it is just plain wrong to consider moving a large sum of money in another investment over a long period of time as "Dollar Cost Averaging".

DCA is really best used to describe setting aside a fixed amount of money from an income stream, such as a paycheck.
No, that's backwards. You are describing periodica lump sums. You're putting in all you have at once, at regular intervals. There's nothing special about that and nothing to compare it to.

The real DCA is an alternate way to invest a sum of money.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by White Coat Investor » Tue Apr 02, 2019 2:36 pm

alex123711 wrote:
Fri Mar 29, 2019 7:16 pm
If the best option is by averaging into the index is to dollar cost average over a long period, what is a reasonable time frame to do this, if one was mostly holding cash.
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Earl Lemongrab
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Re: Reasonable timeframe to 'average in' to index funds?

Post by Earl Lemongrab » Tue Apr 02, 2019 2:48 pm

As has been noted repeatedly, if DCA was a good strategy for a lump sum, then it would be a good strategy for already invested money, at least in tax-advantaged accounts. So one should be constantly selling and doing DCA back in.

Anything else is mental accounting, by treating money in cash differently than money that could be cash in an instant.

So today I did a lump sum of >1million into the stock market. Same as yesterday. And Friday . . .

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Re: Reasonable timeframe to 'average in' to index funds?

Post by CurlyDave » Wed Apr 03, 2019 2:21 am

Earl Lemongrab wrote:
Tue Apr 02, 2019 2:29 pm
CurlyDave wrote:
Tue Apr 02, 2019 12:15 am
I think that it is just plain wrong to consider moving a large sum of money in another investment over a long period of time as "Dollar Cost Averaging".

DCA is really best used to describe setting aside a fixed amount of money from an income stream, such as a paycheck.
No, that's backwards. You are describing periodica lump sums. You're putting in all you have at once, at regular intervals. There's nothing special about that and nothing to compare it to.

The real DCA is an alternate way to invest a sum of money.
Our glossary (look up DCA) has a link to Investopedia which states in part:

"...A perfect example of dollar cost averaging is its use in 401(k) plans.

In a 401(k) plan, an employee can select a pre-determined amount of their salary that they wish to invest in a menu of mutual or index funds. When an employee receives their pay, the amount the employee has chosen to contribute to the 401(k) is invested in their investment choices..."

I think you are the one who has it backwards...

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Re: Reasonable timeframe to 'average in' to index funds?

Post by JustinR » Wed Apr 03, 2019 2:41 am

CurlyDave wrote:
Wed Apr 03, 2019 2:21 am
Earl Lemongrab wrote:
Tue Apr 02, 2019 2:29 pm
CurlyDave wrote:
Tue Apr 02, 2019 12:15 am
I think that it is just plain wrong to consider moving a large sum of money in another investment over a long period of time as "Dollar Cost Averaging".

DCA is really best used to describe setting aside a fixed amount of money from an income stream, such as a paycheck.
No, that's backwards. You are describing periodica lump sums. You're putting in all you have at once, at regular intervals. There's nothing special about that and nothing to compare it to.

The real DCA is an alternate way to invest a sum of money.
Our glossary (look up DCA) has a link to Investopedia which states in part:

"...A perfect example of dollar cost averaging is its use in 401(k) plans.

In a 401(k) plan, an employee can select a pre-determined amount of their salary that they wish to invest in a menu of mutual or index funds. When an employee receives their pay, the amount the employee has chosen to contribute to the 401(k) is invested in their investment choices..."

I think you are the one who has it backwards...
The definition you're using is worthless for almost all investing talk, since that's how most people invest anyways. Everyone invests periodically or when they get their paycheck.

The use of DCA here is about having a specific amount of money, and spreading it out (DCA) versus investing it all at once (lump sum).

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Re: Reasonable timeframe to 'average in' to index funds?

Post by msk » Wed Apr 03, 2019 2:50 am

Fifteen minutes sounds reasonable. You know, the time it takes to initiate positions on a handful of ETFs. A year later you'll know whether you were rash or super clever. Last time I did that for a mid 7 figure sum (end 2016) it turned out I had been super clever :moneybag :mrgreen: Perhaps next time :oops: But then do your evaluation after 2 years, or 3... Ah well, there's a 60% chance towards the clever side...

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Re: Reasonable timeframe to 'average in' to index funds?

Post by CurlyDave » Wed Apr 03, 2019 3:22 am

JustinR wrote:
Wed Apr 03, 2019 2:41 am
CurlyDave wrote:
Wed Apr 03, 2019 2:21 am
Earl Lemongrab wrote:
Tue Apr 02, 2019 2:29 pm
CurlyDave wrote:
Tue Apr 02, 2019 12:15 am
I think that it is just plain wrong to consider moving a large sum of money in another investment over a long period of time as "Dollar Cost Averaging".

DCA is really best used to describe setting aside a fixed amount of money from an income stream, such as a paycheck.
No, that's backwards. You are describing periodica lump sums. You're putting in all you have at once, at regular intervals. There's nothing special about that and nothing to compare it to.

The real DCA is an alternate way to invest a sum of money.
Our glossary (look up DCA) has a link to Investopedia which states in part:

"...A perfect example of dollar cost averaging is its use in 401(k) plans.

In a 401(k) plan, an employee can select a pre-determined amount of their salary that they wish to invest in a menu of mutual or index funds. When an employee receives their pay, the amount the employee has chosen to contribute to the 401(k) is invested in their investment choices..."

I think you are the one who has it backwards...
The definition you're using is worthless for almost all investing talk, since that's how most people invest anyways. Everyone invests periodically or when they get their paycheck.

The use of DCA here is about having a specific amount of money, and spreading it out (DCA) versus investing it all at once (lump sum).
If you want to call a mule a horse, you can do that.

The problem is that the lump sum is invested the minute it comes into your possession, and what you are doing is an incremental rebalance, not true DCA.

There is a wide world of investing outside of this forum, where DCA has a specific meaning, which is the one I quoted. I agree with you that is the the normal way to invest and not some super-sophisticated technique that many advisors make it out to be.

But it is useful to have our definitions be consistent with those of the broader financial world.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by dbr » Wed Apr 03, 2019 8:35 am

CurlyDave wrote:
Wed Apr 03, 2019 3:22 am


If you want to call a mule a horse, you can do that.

The problem is that the lump sum is invested the minute it comes into your possession, and what you are doing is an incremental rebalance, not true DCA.

There is a wide world of investing outside of this forum, where DCA has a specific meaning, which is the one I quoted. I agree with you that is the the normal way to invest and not some super-sophisticated technique that many advisors make it out to be.

But it is useful to have our definitions be consistent with those of the broader financial world.
Dave, thank you. You are correct. I have no idea how DCA has gotten so miss-used. Your observation that the issue is not about when to invest but rather about what asset allocation to hold is precious. This lies at the heart of why this discussion goes on and on and on. I am convinced that the source of anxiety about lump sum investing goes back to actually not being sure if the proposed asset allocation is a good choice, and the reexamination should happen there. It is not credible that DCA is a method to immunize the investor from long term losses.

Note, by the way, that the original advantage of DCA refers to the benefit of investing a fixed dollar amount in shares every period rather than buying a fixed number of shares every period. The former results in a lower average share price purchased than the latter. The relevance is to a time period when buying shares in round lots was otherwise preferred. The tactic is moot in the days of mutual funds which can be purchased in dollar lots.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by 3funder » Wed Apr 03, 2019 8:41 am

How much money are we talking, and into what type of account?

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Re: Reasonable timeframe to 'average in' to index funds?

Post by CABob » Wed Apr 03, 2019 10:06 am

Isn't the real issue with whether an investment is DCA or lump sum is where the money is coming from? If the money is already invested and one is just redeploying a portion it is just that and the lump sum vs. DCA doesn't really apply. If it is significant "new money" coming from bonus, inheritance, large gift, etc. then the issue becomes appropriate.
Bob

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Re: Reasonable timeframe to 'average in' to index funds?

Post by vineviz » Wed Apr 03, 2019 10:22 am

dbr wrote:
Wed Apr 03, 2019 8:35 am
CurlyDave wrote:
Wed Apr 03, 2019 3:22 am
There is a wide world of investing outside of this forum, where DCA has a specific meaning, which is the one I quoted. I agree with you that is the the normal way to invest and not some super-sophisticated technique that many advisors make it out to be.
Note, by the way, that the original advantage of DCA refers to the benefit of investing a fixed dollar amount in shares every period rather than buying a fixed number of shares every period. The former results in a lower average share price purchased than the latter. The relevance is to a time period when buying shares in round lots was otherwise preferred. The tactic is moot in the days of mutual funds which can be purchased in dollar lots.
Thanks to both of you for making this point so well.

The benefits of dollar cost averaging (aka "cost averaging") were known as early as the 1930s - the earliest reference I can find in print is from 1935 - but it really seems to have taken off in popularity in the late 1940s. Kiplinger Magazine started promoting it in the early 1950s, possibly because many brokerages had started plans for individual investors. Interestingly, the origins of the TIAA-CREF annuity plan partly lie in the advent of DCA as well.
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Re: Reasonable timeframe to 'average in' to index funds?

Post by Earl Lemongrab » Wed Apr 03, 2019 11:40 am

We can argue about which is the "One True DCA", but using the term for different things is confusing. On this forum, the usage is firmly in the "DCA versus lump sum" camp. Trying to change that will be non-productive.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by dbr » Wed Apr 03, 2019 11:54 am

Earl Lemongrab wrote:
Wed Apr 03, 2019 11:40 am
We can argue about which is the "One True DCA", but using the term for different things is confusing. On this forum, the usage is firmly in the "DCA versus lump sum" camp. Trying to change that will be non-productive.
I used to think that the reason DCA is even mentioned in the above context was because people had read somewhere that DCA, meaning fixed dollar rather than fixed shares investment, was a good idea and had confused that with DCA vs lump sum. Now I understand that on this forum DCA really is only about lump sum investing and no one has even heard of the original rationale. However, now the mystery is why anyone would think DCA would be a good idea. The only reason that makes any sense is that if the market falls while in the process of DCA one can avoid the irrational regret one would have had had one invested everything at the beginning. I guess the question to ask of the people who bring up this issue is why are they asking. I mean that as a serious question. Is this no more than the standard "If there is a choice, there is a debate." thing?

I guess the other thing that can happen is that as a practical matter one might not so easily place a large amount of money in various investments without taking some time to make sure all the transactions are happening as intended. There are investment companies that have a bit of a reputation for munging which funds and which accounts different assets are to go to.

WhiteMaxima
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Re: Reasonable timeframe to 'average in' to index funds?

Post by WhiteMaxima » Wed Apr 03, 2019 12:52 pm

alex123711 wrote:
Fri Mar 29, 2019 7:16 pm
If the best option is by averaging into the index is to dollar cost average over a long period, what is a reasonable time frame to do this, if one was mostly holding cash.
Average in and average out of index are the rules of BH investing.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by willthrill81 » Wed Apr 03, 2019 2:03 pm

WhiteMaxima wrote:
Wed Apr 03, 2019 12:52 pm
alex123711 wrote:
Fri Mar 29, 2019 7:16 pm
If the best option is by averaging into the index is to dollar cost average over a long period, what is a reasonable time frame to do this, if one was mostly holding cash.
Average in and average out of index are the rules of BH investing.
False. The reason most investors in the accumulation phase dollar cost average into markets is because that's the only choice we really have. When we're paid, we make contributions to our accounts.

An investor could change their AA from 80/20 to 20/80 the day they retire and not 'violate' any BH principle.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Reasonable timeframe to 'average in' to index funds?

Post by vineviz » Wed Apr 03, 2019 2:14 pm

dbr wrote:
Wed Apr 03, 2019 11:54 am
However, now the mystery is why anyone would think DCA would be a good idea. The only reason that makes any sense is that if the market falls while in the process of DCA one can avoid the irrational regret one would have had had one invested everything at the beginning. I guess the question to ask of the people who bring up this issue is why are they asking.
I'm confident that the answer to your questions lies in the behavioral phenomenon of "regret aversion".

Because future market conditions are unknowable, it's not possible to know with certainty whether the investment decision had the most favorable outcome until after the fact. Choosing a course of action that turns out to have an unfavorable outcome can lead to feelings of regret, even if the chosen course of action had the highest a priori expected value. Regret can be a highly aversive emotion for people, and some people experience it more intensely than others.

Investing a lump sum in increments over time could be viewed as "rational" way of minimizing regret for the investor, at least from a behavioral economics perspective. In other words, it might be utility-maximizing even if it isn't return-maximizing.

Regret aversion is one reason that people defer important decisions to professionals (like financial advisors or active fund managers) even when it is economically sub-optimal to do so. If things go well the investor can feel good that they "picked a right advisor" or fund. If things go badly, they can blame the advisor for the mistake instead of blaming themselves.

This paper is about regret and health behavior but many of the same concepts apply to financial behaviors: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5408743/
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Reasonable timeframe to 'average in' to index funds?

Post by dbr » Wed Apr 03, 2019 2:25 pm

vineviz wrote:
Wed Apr 03, 2019 2:14 pm
dbr wrote:
Wed Apr 03, 2019 11:54 am
However, now the mystery is why anyone would think DCA would be a good idea. The only reason that makes any sense is that if the market falls while in the process of DCA one can avoid the irrational regret one would have had had one invested everything at the beginning. I guess the question to ask of the people who bring up this issue is why are they asking.
I'm confident that the answer to your questions lies in the behavioral phenomenon of "regret aversion".

Because future market conditions are unknowable, it's not possible to know with certainty whether the investment decision had the most favorable outcome until after the fact. Choosing a course of action that turns out to have an unfavorable outcome can lead to feelings of regret, even if the chosen course of action had the highest a priori expected value. Regret can be a highly aversive emotion for people, and some people experience it more intensely than others.

Investing a lump sum in increments over time could be viewed as "rational" way of minimizing regret for the investor, at least from a behavioral economics perspective. In other words, it might be utility-maximizing even if it isn't return-maximizing.

Regret aversion is one reason that people defer important decisions to professionals (like financial advisors or active fund managers) even when it is economically sub-optimal to do so. If things go well the investor can feel good that they "picked a right advisor" or fund. If things go badly, they can blame the advisor for the mistake instead of blaming themselves.

This paper is about regret and health behavior but many of the same concepts apply to financial behaviors: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5408743/
Yes, that all makes sense. The problem I have with that analysis is that the person is still subject to the same regret as soon as the money is fully invested and for all time after that. Shouldn't a person feel just as much regret if the market plunges 50% the day after they are fully invested as they would have had they fully invested on day 1 and the market then plunged? After all, most of those proposing DCA are talking about a few months or a year to position for decades if investment. It seems to me that the problem here is the framing that everything has to do with what happens this year and has nothing to do with the rest of a person's life. Where does that come from?

On the other hand, maybe we should take the OP's question more seriously and suggest that the time duration to DCA should be 100 years, meaning that for his lifetime he will not reach complete investment of the money. This would be consistent with the view that the real problem is that he is not comfortable with taking all that risk and should select a less risky asset allocation to start with. If that seems draconian then the suggestion would be to invest half now and the other half over 100 years.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by vineviz » Wed Apr 03, 2019 2:55 pm

dbr wrote:
Wed Apr 03, 2019 2:25 pm
Yes, that all makes sense. The problem I have with that analysis is that the person is still subject to the same regret as soon as the money is fully invested and for all time after that.
I think we can see that most people don't experience regret in that way, nor do they seem to expect that they will experience regret in that way.

dbr wrote:
Wed Apr 03, 2019 2:25 pm
Shouldn't a person feel just as much regret if the market plunges 50% the day after they are fully invested as they would have had they fully invested on day 1 and the market then plunged?
I'm not sure if they SHOULD feel that way, but it doesn't seem like most people DO feel that way.

To be clear, I think that the evidence is clear that investing a lump sum all at once is choice most likely to maximize wealth.

I think the evidence is also clear the some people will not be able to bring themselves to do that, and for them the alternative to investing in a lump sum might possibly be not investing at all or choosing a recklessly conservative asset allocation instead. Education only goes so far, and ultimately I'd rather see someone invest incrementally over a couple of months in an appropriate asset allocation than park their assets in CDs (or worse) for years on end.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Reasonable timeframe to 'average in' to index funds?

Post by bberris » Wed Apr 03, 2019 2:56 pm

Earl Lemongrab wrote:
Tue Apr 02, 2019 2:48 pm
As has been noted repeatedly, if DCA was a good strategy for a lump sum, then it would be a good strategy for already invested money, at least in tax-advantaged accounts. So one should be constantly selling and doing DCA back in.

Anything else is mental accounting, by treating money in cash differently than money that could be cash in an instant.

So today I did a lump sum of >1million into the stock market. Same as yesterday. And Friday . . .
Does anyone talk about "averaging out" of the market? I didn't think so.

I think livesoft has shared his strategy for investing on RBDs. I'm not sure that he sells on RGDs.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by Red Spot » Wed Apr 03, 2019 3:07 pm

dbr wrote:
Wed Apr 03, 2019 2:25 pm
vineviz wrote:
Wed Apr 03, 2019 2:14 pm
dbr wrote:
Wed Apr 03, 2019 11:54 am
However, now the mystery is why anyone would think DCA would be a good idea. The only reason that makes any sense is that if the market falls while in the process of DCA one can avoid the irrational regret one would have had had one invested everything at the beginning. I guess the question to ask of the people who bring up this issue is why are they asking.
I'm confident that the answer to your questions lies in the behavioral phenomenon of "regret aversion".

Because future market conditions are unknowable, it's not possible to know with certainty whether the investment decision had the most favorable outcome until after the fact. Choosing a course of action that turns out to have an unfavorable outcome can lead to feelings of regret, even if the chosen course of action had the highest a priori expected value. Regret can be a highly aversive emotion for people, and some people experience it more intensely than others.

Investing a lump sum in increments over time could be viewed as "rational" way of minimizing regret for the investor, at least from a behavioral economics perspective. In other words, it might be utility-maximizing even if it isn't return-maximizing.

Regret aversion is one reason that people defer important decisions to professionals (like financial advisors or active fund managers) even when it is economically sub-optimal to do so. If things go well the investor can feel good that they "picked a right advisor" or fund. If things go badly, they can blame the advisor for the mistake instead of blaming themselves.

This paper is about regret and health behavior but many of the same concepts apply to financial behaviors: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5408743/
Yes, that all makes sense. The problem I have with that analysis is that the person is still subject to the same regret as soon as the money is fully invested and for all time after that. Shouldn't a person feel just as much regret if the market plunges 50% the day after they are fully invested as they would have had they fully invested on day 1 and the market then plunged? After all, most of those proposing DCA are talking about a few months or a year to position for decades if investment. It seems to me that the problem here is the framing that everything has to do with what happens this year and has nothing to do with the rest of a person's life. Where does that come from?

On the other hand, maybe we should take the OP's question more seriously and suggest that the time duration to DCA should be 100 years, meaning that for his lifetime he will not reach complete investment of the money. This would be consistent with the view that the real problem is that he is not comfortable with taking all that risk and should select a less risky asset allocation to start with. If that seems draconian then the suggestion would be to invest half now and the other half over 100 years.
I would offer that the behavioral component is larger than a lot of Bogleheads will admit to as they believe they have identified a “winning” algorithm.
If the day after you retire your portfolio loses 50% you could argue that given time (if you have it) it will recover.
An alternative reaction might be – oh dear- I now have to live on the amount of assets I had X years ago
So did I lose money or part of my life?

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Re: Reasonable timeframe to 'average in' to index funds?

Post by Earl Lemongrab » Wed Apr 03, 2019 4:20 pm

CABob wrote:
Wed Apr 03, 2019 10:06 am
Isn't the real issue with whether an investment is DCA or lump sum is where the money is coming from? If the money is already invested and one is just redeploying a portion it is just that and the lump sum vs. DCA doesn't really apply. If it is significant "new money" coming from bonus, inheritance, large gift, etc. then the issue becomes appropriate.
Not really. That's only mental accounting, by treating the "new" money as different than "old". Now, a signficant change to overall portfolio size might warrant a different allocation, but that should be done all at once. Doing DCA for a year because "I'd hate to put it all in and have a crash" indicates that one would be okay with a crash as soon as the DCA is complete. Somehow I doubt that.

There's also this idea that if the crash comes halfway in, one would buy cheaper shares. I doubt that. More likely, someone prone to DCA would freeze and stop the DCA until things "settle down". Meaning the market goes back up.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by dbr » Wed Apr 03, 2019 4:42 pm

vineviz wrote:
Wed Apr 03, 2019 2:55 pm


I think the evidence is also clear the some people will not be able to bring themselves to do that, and for them the alternative to investing in a lump sum might possibly be not investing at all or choosing a recklessly conservative asset allocation instead. Education only goes so far, and ultimately I'd rather see someone invest incrementally over a couple of months in an appropriate asset allocation than park their assets in CDs (or worse) for years on end.
That is quite sensible if/when it applies.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by JustinR » Wed Apr 03, 2019 6:21 pm

There's not anything to discuss when it comes to DCA.

It literally doesn't make any sense as a strategy. Zero sense.

It's an irrational mental trick to make yourself feel better and that's it.
Last edited by JustinR on Wed Apr 03, 2019 10:00 pm, edited 1 time in total.

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Re: Reasonable timeframe to 'average in' to index funds?

Post by Hubris » Wed Apr 03, 2019 8:55 pm

Some good comments here, especially those that focus on what people can or really will do. I like the approach posted by Jonathan Clements, and thinking about whether the sum to be invested is a once in a lifetime or in common or late in life occurrence or the opposite, and of course the need, willingness and ability to take risk.

https://humbledollar.com/money-guide/ea ... he-market/

From my personal perspective, we had a substantial lump sum come our way (hard to call it a windfall since I earned every penny) and we/it fell into the former category, so have taken a more methodical and slower paced approach to investing a set increment every month, and in proportion to our existing AA.

Interestingly the lump sum reduced our need and willingness to take risk but increased our ability to do so. So, we’re prioritizing risk reduction or loss aversion (or perceptions of such) over return maximization.

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