Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

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michaeljc70
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Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by michaeljc70 » Thu Sep 26, 2019 10:06 am

This is a short article that gives an interesting example of how DCA can benefit you beyond the most obvious (due to volatility). He looked at only 1 period as an example so YMMV.

Basically, from 1/2000 to 8/2019 the total stock market returned 5.9% annually while total bond returned 4.9%. Not a huge difference. However, take a person that started DCA and added $1k per month. If they put it into total stock they would have $631k while someone that did the same in total bond would have $362k. Obviously a huge difference.

http://www.servowealth.com/blog/how-gr ... half-of-it

It is by a CFA at a wealth management firm but I didn't see any pushes to sell anything in the article.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by CyclingDuo » Thu Sep 26, 2019 10:31 am

michaeljc70 wrote:
Thu Sep 26, 2019 10:06 am
This is a short article that gives an interesting example of how DCA can benefit you beyond the most obvious (due to volatility). He looked at only 1 period as an example so YMMV.

Basically, from 1/2000 to 8/2019 the total stock market returned 5.9% annually while total bond returned 4.9%. Not a huge difference. However, take a person that started DCA and added $1k per month. If they put it into total stock they would have $631k while someone that did the same in total bond would have $362k. Obviously a huge difference.

http://www.servowealth.com/blog/how-gr ... half-of-it

It is by a CFA at a wealth management firm but I didn't see any pushes to sell anything in the article.
Certainly well written by the author in support of having a plan and sticking with it via automated contributions from every paycheck during one's working career (built in DCA) and the accumulation years. This is the way we all invest outside of receiving lump sums from any windfalls (pension lump sum, inheritance, large year end bonus, settlement, severance, etc...).
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by Carol88888 » Thu Sep 26, 2019 2:23 pm

The author states at the end that if one has the money at hand to invest and instead chooses to dollar cost average it as opposed to lump sum investment, then one can be accused of market timing.

I am not sure I agree with that. Couldn't you turn the statement around and say that if you do a lump sum you are also market timing - banking on the market's tendency to go up over time?

I've been putting sums to work as soon as I get them because I think there will be an election year rally. So I guess I am a market timer at heart.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by jabroni » Thu Sep 26, 2019 2:31 pm

Carol88888 wrote:
Thu Sep 26, 2019 2:23 pm
The author states at the end that if one has the money at hand to invest and instead chooses to dollar cost average it as opposed to lump sum investment, then one can be accused of market timing.

I am not sure I agree with that. Couldn't you turn the statement around and say that if you do a lump sum you are also market timing - banking on the market's tendency to go up over time?

I've been putting sums to work as soon as I get them because I think there will be an election year rally. So I guess I am a market timer at heart.
Except that history shows that lump sum outperforms DCA 80% of the time.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by Lee_WSP » Thu Sep 26, 2019 3:57 pm

I think this article is referring to DCA as put it in as soon as you get it over the course of a lifetime, as opposed to the disputed "should I invest my windfall all at once or DCA it in over a year?".

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by michaeljc70 » Thu Sep 26, 2019 4:03 pm

Lee_WSP wrote:
Thu Sep 26, 2019 3:57 pm
I think this article is referring to DCA as put it in as soon as you get it over the course of a lifetime, as opposed to the disputed "should I invest my windfall all at once or DCA it in over a year?".
Yes. The language he used at the end was not great in trying to distinguish between normal investing from paychecks vs. larger lump sums like inheritance, bonus or whatever.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by One Ping » Thu Sep 26, 2019 4:25 pm

Yes, The language is terrible, to the point of being misleading.
servowealth wrote: One final word of advice: dollar-cost-averaging is a strategy to invest money as soon as it becomes available, such as from periodic paychecks.
Seems like if you are investing the money as soon as it becomes available your are really 'lump-summing'. The fact that you have money available to do this periodically doesn't change it to dollar cost averaging, you are still investing what you have available, all at once, as soon as possible ... the very definition of lump sum investing.
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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by Rotwang » Thu Sep 26, 2019 4:55 pm

I think the salient point of the article is that if you are investing regular amounts at regular intervals, then investing in higher volatility (stocks) can significantly outperform low volatility (bonds) even if both classes average about the same over the long term.

In other words, during the accumulation phase, volatility can be your friend :happy

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by abuss368 » Thu Sep 26, 2019 5:02 pm

Appreciate the article and thank you for sharing.
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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by One Ping » Thu Sep 26, 2019 5:13 pm

Rotwang wrote:
Thu Sep 26, 2019 4:55 pm
In other words, during the accumulation phase, volatility can be your friend :happy
Yes. Reminds me of the old 'Synchrovest'/'Automatic Investment Management (AIM)' approach developed by Robert Lichello. (Google it, if interested.) Works really well if you have an investment that is dependably extremely volatile. Not so much for less volatile or secular markets.
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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by samsdad » Thu Sep 26, 2019 5:38 pm

Didn’t we just have a thread that showed that lump-summing was better than DCAing, even if it meant lump-summing a much more bond-heavy AA, or did I just imagine that?

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by Lee_WSP » Thu Sep 26, 2019 6:38 pm

samsdad wrote:
Thu Sep 26, 2019 5:38 pm
Didn’t we just have a thread that showed that lump-summing was better than DCAing, even if it meant lump-summing a much more bond-heavy AA, or did I just imagine that?
I think the topic comes up fairly often as it's a fairly common question striking at the heart of investor's hopes & fears.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by rascott » Thu Sep 26, 2019 7:21 pm

Rotwang wrote:
Thu Sep 26, 2019 4:55 pm
I think the salient point of the article is that if you are investing regular amounts at regular intervals, then investing in higher volatility (stocks) can significantly outperform low volatility (bonds) even if both classes average about the same over the long term.

In other words, during the accumulation phase, volatility can be your friend :happy

Absolutely.... and why people should be 100% equity for at least their first 20 years of accumulation.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by rascott » Thu Sep 26, 2019 7:26 pm

samsdad wrote:
Thu Sep 26, 2019 5:38 pm
Didn’t we just have a thread that showed that lump-summing was better than DCAing, even if it meant lump-summing a much more bond-heavy AA, or did I just imagine that?

Nope... and this author says the same thing at the end. But this is really the same thing.... you are lump-summing everything you've got to invest every paycheck.... not holding any back in cash looking for a better entry point.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by 305pelusa » Thu Sep 26, 2019 7:27 pm

samsdad wrote:
Thu Sep 26, 2019 5:38 pm
Didn’t we just have a thread that showed that lump-summing was better than DCAing, even if it meant lump-summing a much more bond-heavy AA, or did I just imagine that?
Yes but no matter how hard one tries, this notion of DCA allowing for "dip buying" and achieving an average lower cost basis will not die.
Rotwang wrote:
Thu Sep 26, 2019 4:55 pm
I think the salient point of the article is that if you are investing regular amounts at regular intervals, then investing in higher volatility (stocks) can significantly outperform low volatility (bonds) even if both classes average about the same over the long term.

In other words, during the accumulation phase, volatility can be your friend :happy
That is the argument that writers like Bernstein and this article try to claim. Only it's wrong.

It's just that the author has been very sneaky about the time period he used. He picked a window where the beginning is bearish (2000-2008) and the end is bullish (2009-2019). That's going to look outstanding for DCA-stocks because it is much more invested later on.

But let's do the opposite. Let's compare the 20 years of 1988-2008.
In such a time period, VFINX did much better annually than VBMFX (8.67% vs 7.18%). Stock outperformance was bigger than in the author's article. But if you DCAed, you actually would come out behind by using VFINX. Even though VFINX's St. Dev. was 3x that of VBMFX during that time period.

You read that right ^. In a time period where stocks performed better than bonds, DCAing led to much better results for those who picked the low volatility asset.

I will let you make your own conclusions.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by michaeljc70 » Thu Sep 26, 2019 7:32 pm

305pelusa wrote:
Thu Sep 26, 2019 7:27 pm
samsdad wrote:
Thu Sep 26, 2019 5:38 pm
Didn’t we just have a thread that showed that lump-summing was better than DCAing, even if it meant lump-summing a much more bond-heavy AA, or did I just imagine that?
Yes but no matter how hard one tries, this notion of DCA allowing for "dip buying" and achieving an average lower cost basis will not die.
Rotwang wrote:
Thu Sep 26, 2019 4:55 pm
I think the salient point of the article is that if you are investing regular amounts at regular intervals, then investing in higher volatility (stocks) can significantly outperform low volatility (bonds) even if both classes average about the same over the long term.

In other words, during the accumulation phase, volatility can be your friend :happy
That is the argument that writers like Bernstein and this article try to claim. Only it's wrong.

It's just that the author has been very sneaky about the time period he used. He picked a window where the beginning is bearish (2000-2008) and the end is bullish (2009-2019). That's going to look outstanding for DCA-stocks because it is much more invested later on.

But let's do the opposite. Let's compare the 20 years of 1988-2008.
In such a time period, VFINX did much better annually than VBMFX (8.67% vs 7.18%). Stock outperformance was bigger than in the author's article. But if you DCAed, you actually would come out behind by using VFINX. Even though VFINX's St. Dev. was 3x that of VBMFX during that time period.

You read that right ^. In a time period where stocks performed better than bonds, DCAing led to much better results for those who picked the low volatility asset.

I will let you make your own conclusions.
Because you can find a period where it underperformed doesn't make it wrong. You also used a different index (presumably because there wasn't enough total stock market data).

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by venkman » Thu Sep 26, 2019 9:54 pm

michaeljc70 wrote:
Thu Sep 26, 2019 10:06 am
Basically, from 1/2000 to 8/2019 the total stock market returned 5.9% annually while total bond returned 4.9%. Not a huge difference. However, take a person that started DCA and added $1k per month. If they put it into total stock they would have $631k while someone that did the same in total bond would have $362k. Obviously a huge difference.
If, instead of DCA'ing $1k per month for 236 months, you had invested a $236k lump sum in VTSMX (Vanguard Total Stock Market) on 1/1/2000, you would have had $722k at the end of August 2019. That seems like a far more relevant metric than a comparison to bonds.

https://www.portfoliovisualizer.com/bac ... 0&total3=0

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by michaeljc70 » Thu Sep 26, 2019 10:05 pm

venkman wrote:
Thu Sep 26, 2019 9:54 pm
michaeljc70 wrote:
Thu Sep 26, 2019 10:06 am
Basically, from 1/2000 to 8/2019 the total stock market returned 5.9% annually while total bond returned 4.9%. Not a huge difference. However, take a person that started DCA and added $1k per month. If they put it into total stock they would have $631k while someone that did the same in total bond would have $362k. Obviously a huge difference.
If, instead of DCA'ing $1k per month for 236 months, you had invested a $236k lump sum in VTSMX (Vanguard Total Stock Market) on 1/1/2000, you would have had $722k at the end of August 2019. That seems like a far more relevant metric than a comparison to bonds.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
The money was from paychecks. They didn't have the money to invest upfront. That obviously ignores the TMV of money.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by venkman » Thu Sep 26, 2019 10:20 pm

michaeljc70 wrote:
Thu Sep 26, 2019 10:05 pm
The money was from paychecks. They didn't have the money to invest upfront. That obviously ignores the TMV of money.
So, his premise is that DCA'ing is the best choice, when there are no other choices? I mean, I'm not going to disagree, but...

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by michaeljc70 » Fri Sep 27, 2019 9:36 am

venkman wrote:
Thu Sep 26, 2019 10:20 pm
michaeljc70 wrote:
Thu Sep 26, 2019 10:05 pm
The money was from paychecks. They didn't have the money to invest upfront. That obviously ignores the TMV of money.
So, his premise is that DCA'ing is the best choice, when there are no other choices? I mean, I'm not going to disagree, but...
His point is that DCA in more volatile asset classes can produce greater returns than DCA in less volatile asset classes even if the returns of the asset classes over a longer period aren't that different.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by PluckyDucky » Fri Sep 27, 2019 10:33 am

DCA is timing the market.

Granted, most people effectively can't do anything BUT DCA due to contributing from their paychecks.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by Lee_WSP » Fri Sep 27, 2019 12:12 pm

michaeljc70 wrote:
Fri Sep 27, 2019 9:36 am
venkman wrote:
Thu Sep 26, 2019 10:20 pm
michaeljc70 wrote:
Thu Sep 26, 2019 10:05 pm
The money was from paychecks. They didn't have the money to invest upfront. That obviously ignores the TMV of money.
So, his premise is that DCA'ing is the best choice, when there are no other choices? I mean, I'm not going to disagree, but...
His point is that DCA in more volatile asset classes can produce greater returns than DCA in less volatile asset classes even if the returns of the asset classes over a longer period aren't that different.
But not always. Running the same scenario with an end date of 2010 yields nearly identical end balances. Ending it during the GFC has 10 year bonds ahead.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by michaeljc70 » Fri Sep 27, 2019 12:45 pm

Lee_WSP wrote:
Fri Sep 27, 2019 12:12 pm
michaeljc70 wrote:
Fri Sep 27, 2019 9:36 am
venkman wrote:
Thu Sep 26, 2019 10:20 pm
michaeljc70 wrote:
Thu Sep 26, 2019 10:05 pm
The money was from paychecks. They didn't have the money to invest upfront. That obviously ignores the TMV of money.
So, his premise is that DCA'ing is the best choice, when there are no other choices? I mean, I'm not going to disagree, but...
His point is that DCA in more volatile asset classes can produce greater returns than DCA in less volatile asset classes even if the returns of the asset classes over a longer period aren't that different.
But not always. Running the same scenario with an end date of 2010 yields nearly identical end balances. Ending it during the GFC has 10 year bonds ahead.
:oops: Who said always? The important thing is it works more often than it doesn't over long periods.
Last edited by michaeljc70 on Fri Sep 27, 2019 12:54 pm, edited 1 time in total.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by lukestuckenhymer » Fri Sep 27, 2019 12:52 pm

DCA'ing a consistent amount in each paycheck sure is convenient, but front-loading your 401k seems to be a more effective strategy to me (unless it deprives you of employer match).

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by 305pelusa » Fri Sep 27, 2019 1:13 pm

michaeljc70 wrote:
Fri Sep 27, 2019 12:45 pm
Lee_WSP wrote:
Fri Sep 27, 2019 12:12 pm
michaeljc70 wrote:
Fri Sep 27, 2019 9:36 am
venkman wrote:
Thu Sep 26, 2019 10:20 pm
michaeljc70 wrote:
Thu Sep 26, 2019 10:05 pm
The money was from paychecks. They didn't have the money to invest upfront. That obviously ignores the TMV of money.
So, his premise is that DCA'ing is the best choice, when there are no other choices? I mean, I'm not going to disagree, but...
His point is that DCA in more volatile asset classes can produce greater returns than DCA in less volatile asset classes even if the returns of the asset classes over a longer period aren't that different.
But not always. Running the same scenario with an end date of 2010 yields nearly identical end balances. Ending it during the GFC has 10 year bonds ahead.
:oops: Who said always? The important thing is it works more often than it doesn't over long periods.
The author did:
" Just remember, (DCA) only works with stocks (don’t buy for a minute the guidance that young investors should own a chunk of bonds) and it only works if you stick with it. "

Had he written down this article in 2008, he would've come to the opposite conclusion. That "it only works with bonds".

And that would also be incorrect. Because it has nothing to do with volatility. It has to do with the market path, a sneaky confounding variable in this article.

Idk about you but I didn't see any analysis testing rolling time periods to show that "it works more often than not".

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by 305pelusa » Fri Sep 27, 2019 1:23 pm

Everyone, note the spread of misinformation:
1) One author thinks DCA superboosts returns of highly volatile assets because it buys dips. Many authors make this claim but it's wrong.
2) He looked at one time period that showed it. Recency, confirmation and survivorship bias notwithstanding.
3) He concludes that it works but ONLY for stocks (highly volatile). Because that was his hypothesis and #2 "confirms" it. No attempt is made to standardize conditions or determine a confounding variable (which really is the source).
4) Writes an article.
5) Online poster reads it and concludes that his findings are fine because all that matters is that they "work more often than not", something the author most definitely does not show.

And round and around we go in the circle of misinformation. Someone will read this thread, think DCA has been shown to "work more often than not" with volatile assets, test a time period, write an article, etc.

Break the cycle OP :sharebeer

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by UpsetRaptor » Fri Sep 27, 2019 2:07 pm

venkman wrote:
Thu Sep 26, 2019 9:54 pm
michaeljc70 wrote:
Thu Sep 26, 2019 10:06 am
Basically, from 1/2000 to 8/2019 the total stock market returned 5.9% annually while total bond returned 4.9%. Not a huge difference. However, take a person that started DCA and added $1k per month. If they put it into total stock they would have $631k while someone that did the same in total bond would have $362k. Obviously a huge difference.
If, instead of DCA'ing $1k per month for 236 months, you had invested a $236k lump sum in VTSMX (Vanguard Total Stock Market) on 1/1/2000, you would have had $722k at the end of August 2019. That seems like a far more relevant metric than a comparison to bonds.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
+1

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by garlandwhizzer » Fri Sep 27, 2019 2:36 pm

It's one thing if you have a huge wad of cash which you intend to move into equities comparing DCA to lump sum investing results. Lump sum wins most of the time, not always, in that scenario. Very few of us are sitting on massive amounts of cash that we intend to invest in equities. What is absolutely fool-proof is investing every month a significant fixed amount from each paycheck into equities and doing that consistently for many years. I personally did that, paying my equity portfolio each month into broadly based funds before paying any other bills and I know that it works consistently and reliably. Buying a fixed amount of equity every month means that as equity prices go down you automatically buy more shares and as equity prices go up you automatically buy fewer shares. This involves no market timing decisions by investors. Investors as a whole are lousy market timers, their own worst enemies. Having a solid plan like this takes market timing risk out of the equation and its positive results rest only on the belief that in the very long term stocks will appreciate which has always happened in the US. The only way to lose with this strategy is a persistent bear market that lasts for decades which has never happened here. The other option is to put this excess monthly income into cash and market time when the investor thinks the moment is right at some later point to lump sum it into the market which I believe to be an inferior choice for handling monthly investments from excess income over the long term.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by Lee_WSP » Fri Sep 27, 2019 3:42 pm

michaeljc70 wrote:
Fri Sep 27, 2019 12:45 pm
Lee_WSP wrote:
Fri Sep 27, 2019 12:12 pm
michaeljc70 wrote:
Fri Sep 27, 2019 9:36 am
venkman wrote:
Thu Sep 26, 2019 10:20 pm
michaeljc70 wrote:
Thu Sep 26, 2019 10:05 pm
The money was from paychecks. They didn't have the money to invest upfront. That obviously ignores the TMV of money.
So, his premise is that DCA'ing is the best choice, when there are no other choices? I mean, I'm not going to disagree, but...
His point is that DCA in more volatile asset classes can produce greater returns than DCA in less volatile asset classes even if the returns of the asset classes over a longer period aren't that different.
But not always. Running the same scenario with an end date of 2010 yields nearly identical end balances. Ending it during the GFC has 10 year bonds ahead.
:oops: Who said always? The important thing is it works more often than it doesn't over long periods.
I think you need to reread the article. Emphasis added below.
Just remember, it only works with stocks (don’t buy for a minute the guidance that young investors should own a chunk of bonds) and it only works if you stick with it.
Of course he then says dollar cost average, but don't dollar cost average, but that is actually technically correct too since the term has at least two definitions.
One final word of advice: dollar-cost-averaging is a strategy to invest money as soon as it becomes available, such as from periodic paychecks. If you have the money to invest, dollar-cost-averaging almost always comes out behind just investing right away. If you have the money to invest but you decide to work it in gradually then you’re not investing, you’re market timing. And you’ll most likely pay for it in terms of much lower returns.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by illumination » Fri Sep 27, 2019 4:00 pm

DCA when a market was in the dumps after a big run up, it makes sense this outperformed lump sum near the peak. It's basically market timing by another name. Look at a longer time frame, move a couple years later or sooner than these specific dates, and lump sum likely wins.

I'll say this though, I completely understand someone getting a "once in a lifetime" windfall and not lump summing it. Even though that's standard advice. I think scheduled DCA is a good middle ground for people in that position and wouldn't fault them.

People talk about the odds in lump sum's favor as if that's the same as certainty. Lump sum wins something like 70%-80% of the time, but that's still a decent sized chance that it doesn't work well. Nobody here would say you should not buy fire insurance even though the odds are probably 99.9% your house won't burn down.

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by Lee_WSP » Fri Sep 27, 2019 6:33 pm

illumination wrote:
Fri Sep 27, 2019 4:00 pm
DCA when a market was in the dumps after a big run up, it makes sense this outperformed lump sum near the peak. It's basically market timing by another name. Look at a longer time frame, move a couple years later or sooner than these specific dates, and lump sum likely wins.
...
DCA is also used to refer to periodic automatic investing as the wiki states.

https://www.bogleheads.org/wiki/Dollar_ ... investment

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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by venkman » Fri Sep 27, 2019 9:35 pm

michaeljc70 wrote:
Fri Sep 27, 2019 9:36 am
His point is that DCA in more volatile asset classes can produce greater returns than DCA in less volatile asset classes even if the returns of the asset classes over a longer period aren't that different.
Okay, but what is he suggesting people DO with this information? Invest exclusively in volatile asset classes when DCA'ing?

If this doesn't override the rule that people should invest according to their risk tolerance, then why does it matter?

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michaeljc70
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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by michaeljc70 » Sat Sep 28, 2019 8:45 am

305pelusa wrote:
Fri Sep 27, 2019 1:23 pm
Everyone, note the spread of misinformation:
1) One author thinks DCA superboosts returns of highly volatile assets because it buys dips. Many authors make this claim but it's wrong.
2) He looked at one time period that showed it. Recency, confirmation and survivorship bias notwithstanding.
3) He concludes that it works but ONLY for stocks (highly volatile). Because that was his hypothesis and #2 "confirms" it. No attempt is made to standardize conditions or determine a confounding variable (which really is the source).
4) Writes an article.
5) Online poster reads it and concludes that his findings are fine because all that matters is that they "work more often than not", something the author most definitely does not show.

And round and around we go in the circle of misinformation. Someone will read this thread, think DCA has been shown to "work more often than not" with volatile assets, test a time period, write an article, etc.

Break the cycle OP :sharebeer
I agree he should have run every 10 year period from say 1920 and told us the results. However, in most periods stocks will trounce bonds making it somewhat moot that the ending stock balance is much higher than the ending bond balance while DCAing. But look at number one above. You claim it is wrong yet provide no data. Perpetuating the cycle :shock:

What is the misinformation?? You shouldn't invest in stocks and DCA? Volatility cannot boost returns of stocks?

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305pelusa
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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by 305pelusa » Sat Sep 28, 2019 9:24 am

michaeljc70 wrote:
Sat Sep 28, 2019 8:45 am
I agree he should have run every 10 year period from say 1920 and told us the results. However, in most periods stocks will trounce bonds making it somewhat moot that the stock return is much higher than the bond return while DCAing.
He's checking whether DCAing into stocks boosts stock returns more than DCAing into bonds boosts bonds returns. Hence, it doesn't actually matter that stocks returns more than bonds; all that matters is the marginal increase in returns from DCA. If you formulate it correctly, you can standardize away the underlying's returns and really isolate DCA's effect.
michaeljc70 wrote:
Sat Sep 28, 2019 8:45 am
But look at number one above. You claim it is wrong yet provide no data. Perpetuating the cycle :shock:
An excellent point. I have worked through some of the math in a previous thread:
viewtopic.php?f=10&t=290659&start=50

If you take some time to think it through, you'll realize all DCA does is change the weighing of yearly returns. There is no DCA "bonus" and hence, there's no reason to believe the DCA bonus increases with volatility. Because there isn't a DCA bonus at all. I admit it's hard to really explain over a thread but the above thread might be helpful.
michaeljc70 wrote:
Sat Sep 28, 2019 8:45 am
What is the misinformation?? You shouldn't invest in stocks and DCA? Volatility cannot boost returns of stocks?
The misinformed argument is the following:
"If you're going to DCA (which us accumulators have to since we get paychecks), then the more volatile the asset, the better on average". This leads to a similar argument that "volatility is your friend when accumulating".

The real answer is that, on average, it neither helps nor hurts. It's neutral. DCA's only source of "alpha" is due to the path the market takes. If you took the time to back test DCA's effect on stocks and bonds, you'd fine that the marginal increase in returns of DCA is similar to stocks and bonds... Because it never depended on volatility any ways.

schooner
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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by schooner » Sat Sep 28, 2019 10:14 am

Great article. I'd say the value of DCA is inversely proportional to the number of articles advocating its use.

Everyone seemed to be preaching its gospel in 2009 during the bear market. The results would have been worse than lump sum.

Now lots of folks are "re-analyzing" the value of DCA after a 10 year bull market. And you get these articles defending its use.

Which is going to win out over the next 10 years. I'd bet on DCA to beat lump sum right now.

Of course all of this is a moot point. How many folks actually come across a large pot of money all of the sudden? It happens, sure. But each situation is so different, it seems pointless to talk about it all of the time.

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Rotwang
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Re: Article - "How Great Is Dollar Cost Averaging? You (Still) Don't Know The Half Of It!"

Post by Rotwang » Sat Sep 28, 2019 4:56 pm

305pelusa wrote:
Sat Sep 28, 2019 9:24 am

The misinformed argument is the following:
"If you're going to DCA (which us accumulators have to since we get paychecks), then the more volatile the asset, the better on average". This leads to a similar argument that "volatility is your friend when accumulating".

The real answer is that, on average, it neither helps nor hurts. It's neutral. DCA's only source of "alpha" is due to the path the market takes. If you took the time to back test DCA's effect on stocks and bonds, you'd fine that the marginal increase in returns of DCA is similar to stocks and bonds... Because it never depended on volatility any ways.
305pelusa, I have to say thanks.
At first I thought you were incorrect or missing something, which caused me to explore the idea in more depth.
I decided to create a simple LibreOffice spreadsheet to see the effects of DCA in action on assets that increase with and without volatility, and I now see what you were saying about how the performance of DCA in a volatile asset is shaped by how the good and bad years are distributed.

OP, thanks for sharing the original article, I still learned from it (and the following BH discussion)

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