Why is lump sum investment option better than DCA?

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bg5
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Why is lump sum investment option better than DCA?

Post by bg5 » Wed May 06, 2020 1:33 pm

I am confused a bit about why people feel lump sum investment is a better option than DCA.

Any feedback on this would be helpful.

I would just think that the DCA option would be safer so you are not putting all your eggs in one basket and if you invest over time it would appear to me to be more conservative vs. the risky invest it all at one time

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Re: Why is lump sum investment option better than DCA?

Post by Call_Me_Op » Wed May 06, 2020 1:36 pm

Lump sum investing is not necessarily better, it is statistically better from a strictly financial standpoint. That is, because the market has generally risen over time, historically you would have made out better on average if you immediately invested a lump sum versus dollar-cost averaged it.

Make sense?
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Re: Why is lump sum investment option better than DCA?

Post by daheld » Wed May 06, 2020 1:37 pm

Others will chime in with more valuable input, but data has shown lump sum investing to be, on average, more financially advantageous. DCA, for many folks, is easier to stomach.

There's no wrong answer and doing what helps you sleep at night is best.

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iceport
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Re: Why is lump sum investment option better than DCA?

Post by iceport » Wed May 06, 2020 1:38 pm

bg5 wrote:
Wed May 06, 2020 1:33 pm
I am confused a bit about why people feel lump sum investment is a better option than DCA.

Any feedback on this would be helpful.

I would just think that the DCA option would be safer so you are not putting all your eggs in one basket and if you invest over time it would appear to me to be more conservative vs. the risky invest it all at one time
Roughly 2/3 of the time investing a lump sum up-front beats DCA; roughly 1/3 of the time, DCA beats lump summing.

Some people look at those odds and figure it's a no-brainer that since, on average, a lump sum is expected to beat DCA, the choice is obvious.

Others look at it like playing Russian roulette with two bullets instead of one, and see the odds of under-performing with the lump sum as large enough to warrant more thought.
"Discipline matters more than allocation.” ─William Bernstein

Silk McCue
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Re: Why is lump sum investment option better than DCA?

Post by Silk McCue » Wed May 06, 2020 1:39 pm

I would encourage to search this site for such topics if your goal is to learn. We have ample threads on this well worn topic including over the past couple of months. There will nothing knew shared in this thread that hasn't been shared on countless others.

Cheers

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Re: Why is lump sum investment option better than DCA?

Post by rbaldini » Wed May 06, 2020 1:41 pm

"Better" is a tough word. One might say lump sum is "better" because it increases your time in the market, which is a net positive. But it also exposes you to slightly more risk. From a risk-adjusted perspective, I'd say neither is really better.

My problem with DCA is that it is usually logically inconsistent. DCA'ing a large value means that you are ok being fully invested 6 months from now (or whatever), but not today. Why? What makes 6 months from now different from today? Usually, no good reason except that people are more scared of losing money they just got than money they've already had for a bit. Which is irrational.
Last edited by rbaldini on Wed May 06, 2020 1:41 pm, edited 1 time in total.

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Re: Why is lump sum investment option better than DCA?

Post by awg75 » Wed May 06, 2020 1:41 pm

I was skeptical on lump sum investing as well at first, but Vanguard I believe did a study that demonstrated that typically 2/3 of the time, lump sum investing over the long-term outperformed DCA simply because we can't time the market. While this isn't always the case and it's impossible to predict where the market will go, if you're a long-term investor, I would err with the odds and just throw it into the market. There are many factors in equities that come in to play such as compounding and having most of your money sitting on the sidelines waiting to be invested over a period of time will typically underperform lump sums. Again, it's time in the market, not timing the market.

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Re: Why is lump sum investment option better than DCA?

Post by livesoft » Wed May 06, 2020 1:49 pm

bg5 wrote:
Wed May 06, 2020 1:33 pm
I am confused a bit about why people feel lump sum investment is a better option than DCA.
The answer is because somebody backtested performance doing LS and DCA and found that LS was slightly better on average about 2/3rds of the time. That is, "better" can be used even if the it means only 0.0001% better. If you look it up, you may find that "better" was only a low single-digit percentage increase in performance on average.

Actually, performance was better for DCA about one-third of the time. LOL!

And you are right, if one can say that "lower performance" is "safer" which is generally true. For instance "cash" is safer than "stocks."
Last edited by livesoft on Wed May 06, 2020 1:50 pm, edited 1 time in total.
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Re: Why is lump sum investment option better than DCA?

Post by Noobvestor » Wed May 06, 2020 1:50 pm

It's really much simpler than a statistical analysis: if you have a plan, you should execute your plan. If your plan is to be 70/30 stocks/bonds, but you're holding 100% cash instead, you're not following your plan. If that plan makes you nervous, you should ask yourself why. If the answer is that you feel like 70% is too much stock risk to take 'all at once' there's a problem - because sooner or later, DCA will get you to that point. And you have no way of knowing in advance whether DCA will ease you in or just cause you to lose out. It's a gamble, plain and simple.

For most people most of the time, investing over time is just a natural byproduct of how we make and save money. In exceptional cases, with windfalls for example, the answer isn't to stress over whether to DCA, or how long to spend pealing off that band-aid, but whether your allocation should change. If you've got $100,000 now and inherit $1,000,000 tomorrow, chances are good you'll want to rethink your allocation. In that case, taking time is a good thing, but DCA is still not a good thing. The time should be taken to rethink the plan, not to spread out its execution.

I am not suggesting anyone rush into a plan, or dump every new windfall immediately into their existing plan. I'm just saying DCA isn't the answer - it's artificial, subjective, prone to behavioral mistakes and often a function of current market conditions and/or concerns about one's allocation. To your specific point about 'all your eggs in one basket' that's exactly the risk of keeping cash, not a diversified mix of stocks and bonds.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Why is lump sum investment option better than DCA?

Post by iceport » Wed May 06, 2020 1:51 pm

rbaldini wrote:
Wed May 06, 2020 1:41 pm
My problem with DCA is that it is usually logically inconsistent. DCA'ing a large value means that you are ok being 100% invested 6 months from now (or whatever), but not today. Why? Usually, no good reason except that people are more scared of losing money they just got than money they've already had for a bit. Which is irrational.
Speaking for myself only — and I could envision using either method, depending on the specific circumstances — it comes down to avoiding regret, not really fear of the risk inherent in a given AA. So yes, it's a psychological consideration, but not the one you described.
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Re: Why is lump sum investment option better than DCA?

Post by rbaldini » Wed May 06, 2020 1:56 pm

iceport wrote:
Wed May 06, 2020 1:51 pm
rbaldini wrote:
Wed May 06, 2020 1:41 pm
My problem with DCA is that it is usually logically inconsistent. DCA'ing a large value means that you are ok being 100% invested 6 months from now (or whatever), but not today. Why? Usually, no good reason except that people are more scared of losing money they just got than money they've already had for a bit. Which is irrational.
Speaking for myself only — and I could envision using either method, depending on the specific circumstances — it comes down to avoiding regret, not really fear of the risk inherent in a given AA. So yes, it's a psychological consideration, but not the one you described.
I suppose my assertion is that DCA is an irrational way to avoid regret. That being said I don't really care if others do it - there are much worse behavioral errors.

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iceport
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Re: Why is lump sum investment option better than DCA?

Post by iceport » Wed May 06, 2020 1:59 pm

rbaldini wrote:
Wed May 06, 2020 1:56 pm
iceport wrote:
Wed May 06, 2020 1:51 pm
rbaldini wrote:
Wed May 06, 2020 1:41 pm
My problem with DCA is that it is usually logically inconsistent. DCA'ing a large value means that you are ok being 100% invested 6 months from now (or whatever), but not today. Why? Usually, no good reason except that people are more scared of losing money they just got than money they've already had for a bit. Which is irrational.
Speaking for myself only — and I could envision using either method, depending on the specific circumstances — it comes down to avoiding regret, not really fear of the risk inherent in a given AA. So yes, it's a psychological consideration, but not the one you described.
I suppose my assertion is that DCA is an irrational way to avoid regret. That being said I don't really care if others do it - there are much worse behavioral errors.
Another way to look at it is that it's the regret that's irrational, not necessarily the reasonable measures that can be taken to mitigate it. However, as a human being, I know I am susceptible to irrational regret. It's just the way I'm wired.
"Discipline matters more than allocation.” ─William Bernstein

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Re: Why is lump sum investment option better than DCA?

Post by RJC » Wed May 06, 2020 2:02 pm

Is DCA better when the market is falling? Say about a month ago?

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Re: Why is lump sum investment option better than DCA?

Post by rbaldini » Wed May 06, 2020 2:03 pm

iceport wrote:
Wed May 06, 2020 1:59 pm
Another way to look at it is that it's the regret that's irrational, not necessarily the reasonable measures that can be taken to mitigate it. However, as a human being, I know I am susceptible to irrational regret. It's just the way I'm wired.
Ah, I see what you mean. Point taken.

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Re: Why is lump sum investment option better than DCA?

Post by rbaldini » Wed May 06, 2020 2:04 pm

RJC wrote:
Wed May 06, 2020 2:02 pm
Is DCA better when the market is falling? Say about a month ago?
...Yes. Because you stay out of the falling market.

Unfortunately that requires hindsight. It's market timing at that point.
Last edited by rbaldini on Wed May 06, 2020 2:13 pm, edited 1 time in total.

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Re: Why is lump sum investment option better than DCA?

Post by magicrat » Wed May 06, 2020 2:11 pm

Because at any given point in time, the expected return of stocks is positive due to the equity risk premium.

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Re: Why is lump sum investment option better than DCA?

Post by Steve Reading » Wed May 06, 2020 3:11 pm

livesoft wrote:
Wed May 06, 2020 1:49 pm
The answer is because somebody backtested performance doing LS and DCA and found that LS was slightly better on average about 2/3rds of the time.
Sorry but that's not right.
rbaldini wrote:
Wed May 06, 2020 1:41 pm
My problem with DCA is that it is usually logically inconsistent. DCA'ing a large value means that you are ok being fully invested 6 months from now (or whatever), but not today. Why? What makes 6 months from now different from today?
^This is the reason.

Now, people have backtested to see just how much better lump sum is. And we found out it has been, historically, in the USA market, over a one year period, a better choice 66% of the time. The number changes based on the market, the time period, etc. This 2/3rds figure quoted is just ONE specific, arbitrary scenario where LS beats DCA. It is not the reason why LS is considered superior.

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Re: Why is lump sum investment option better than DCA?

Post by reln » Wed May 06, 2020 3:15 pm

bg5 wrote:
Wed May 06, 2020 1:33 pm
I am confused a bit about why people feel lump sum investment is a better option than DCA.

Any feedback on this would be helpful.

I would just think that the DCA option would be safer so you are not putting all your eggs in one basket and if you invest over time it would appear to me to be more conservative vs. the risky invest it all at one time
https://personal.vanguard.com/pdf/s315.pdf

About two-thirds of the time, lump sum beats DCA on a 60/40.

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Re: Why is lump sum investment option better than DCA?

Post by nigel_ht » Wed May 06, 2020 5:37 pm

rbaldini wrote:
Wed May 06, 2020 1:41 pm
"Better" is a tough word. One might say lump sum is "better" because it increases your time in the market, which is a net positive. But it also exposes you to slightly more risk. From a risk-adjusted perspective, I'd say neither is really better.

My problem with DCA is that it is usually logically inconsistent. DCA'ing a large value means that you are ok being fully invested 6 months from now (or whatever), but not today. Why? What makes 6 months from now different from today? Usually, no good reason except that people are more scared of losing money they just got than money they've already had for a bit. Which is irrational.
12 months from now hopefully we have a better idea of the impact of covid and volatility will be lower. It's not irrational or logically inconsistent to look at when DCA is advantageous and what the current conditions are to determine if DCA or Lump Sum results in better performance. In a bull market? Lump Sum will win. In a Bear Market. DCA will win.

The objective is not to have a perfect AA but to have a bigger portfolio.

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Re: Why is lump sum investment option better than DCA?

Post by bertilak » Wed May 06, 2020 5:49 pm

It's simple.
  1. You want to invest.
  2. DCA avoids investing.
DCA is a self-contradictory proposition.

If you think it better, on average, to have half your money in cash it is simpler to do that directly and not average out a varying AA. That's too much monkey business to achieve a simple goal.
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Re: Why is lump sum investment option better than DCA?

Post by bog419 » Wed May 06, 2020 6:15 pm

"Any feedback on this would be helpful." Are you sure you want ANY because mine is not popular opinion here ?

It's not.

It's like a a russian roulette with 3 holes and one bullet. One never wants to play such a game, especially now.

There is a guy who asked the very same question in this very same forum, mind you it was in february. He asked for advice like you, but this was real money. 7 figures. He got the usual Boglehead gospel : "time in the market... ". Times 100 posts.

He lumpsumed 7 figures SP500 @3300.

True story and food for thought. Hope this help. :D

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Re: Why is lump sum investment option better than DCA?

Post by Triple digit golfer » Wed May 06, 2020 6:28 pm

rbaldini wrote:
Wed May 06, 2020 1:41 pm
"Better" is a tough word. One might say lump sum is "better" because it increases your time in the market, which is a net positive. But it also exposes you to slightly more risk. From a risk-adjusted perspective, I'd say neither is really better.

My problem with DCA is that it is usually logically inconsistent. DCA'ing a large value means that you are ok being fully invested 6 months from now (or whatever), but not today. Why? What makes 6 months from now different from today? Usually, no good reason except that people are more scared of losing money they just got than money they've already had for a bit. Which is irrational.
This is a great reply.

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Re: Why is lump sum investment option better than DCA?

Post by cos » Wed May 06, 2020 6:36 pm

bog419 wrote:
Wed May 06, 2020 6:15 pm
It's like a a russian roulette with 3 holes and one bullet. One never wants to play such a game, especially now.
So you'd rather play Russian roulette with three holes and two bullets? How is that better?


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Re: Why is lump sum investment option better than DCA?

Post by TNWoods » Wed May 06, 2020 6:44 pm

Several of the replies have repeated that lump is better 2/3 of the time, DCA only 1/3.

Those numbers make it look super clear cut.

But they are GENERALLY speaking, BROAD rule-of-thumb numbers. In a very volatile time, like right now, if you back test with the specific market behavior we have observed over the last 3 months, the backtest might very well say 4/5 of the time DCA is better than lump.

It feels very good to not have to think about things, to say "nobody knows nuthin'", to casually dismiss questions with a trusted adage, but the truth is, generalizations are true generally, they aren't always true in a specific situation. If they were, it would be true 100% of the time, not just 66%!

But the most important observation has only been hinted at in one reply that I saw:

Lump sum is only a little better than DCA when it is better, (2/3 of the time).

And DCA is only a little better than Lump sum when it is better, (1/3 of the time).

So the final answer on this issue is this: We don't know why Lump is usually better, but even when it is, it doesn't make much difference, even in the very long run.

So tomorrow, get your money invested. Either by lump sum, or by beginning a DCA plan.

It won't make any returns in your mattress.

TNWoods

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Re: Why is lump sum investment option better than DCA?

Post by RonSwanson » Wed May 06, 2020 6:47 pm

I also think it has to do with how often you are going to invest this particular amount of money. If it is a once in a lifetime windfall, then that might be a lot different mentally than something you do multiple times per year with a bonus check or whatever.

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Re: Why is lump sum investment option better than DCA?

Post by rbaldini » Wed May 06, 2020 6:51 pm

Remember: the goal of DCAing is to reduce risk at the cost of reducing some expected return (you are leaving money out of the market for some specified time period). But this can just as easily be achieved by just picking a more conservative asset allocation that you are comfortable being fully invested in *right now*. And with more logical consistency.

If you find yourself saying “Well, I want to be 100% stock (or 80/20, or whatever), just not right away!”, you might ask yourself if that stance makes any sense.

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Re: Why is lump sum investment option better than DCA?

Post by retiredjg » Wed May 06, 2020 6:57 pm

The "lump sum vs DCA" question only exists if you suddenly have a chunk of cash to do something with. And if you do, lump sum does better and that is because the market goes up more than it goes down...over the long haul.

During times like these, it's a crap shoot.

But we all DCA as well. Your biweekly contribution to a 401k is dollar cost averaging. Your monthly contribution to an IRA is dollar cost averaging. If you put $100 into a taxable account and invest it every month, that is dollar cost averaging. If you invest in anything on a regular basis, that is dollar cost averaging.

This is not an either-or thing.

Definitely DCA from your paycheck on a regular basis. In ordinary times, lump sum a windfall or inheritance. In times like these, you pay your money and take your changes. I'd probably lump sum.

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Re: Why is lump sum investment option better than DCA?

Post by bertilak » Wed May 06, 2020 7:01 pm

retiredjg wrote:
Wed May 06, 2020 6:57 pm
Definitely DCA from your paycheck on a regular basis.
What are the alternatives?
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Re: Why is lump sum investment option better than DCA?

Post by ososnilknarf » Wed May 06, 2020 7:07 pm

I disagree with those saying that it is better to lump sum because studies have shown that it has done better 66% of the time. This is like saying that stocks have outperformed bonds X% of the time, so you should ALWAYS put all of your money in stocks. We don't do that because we want to diversify to satisfy our risk tolerance. The same should apply to lump-sum vs DCA, in my opinion. DCA is a form of diversification. You are diversifying buying points in time, instead of gambling it all on a single point in time.

I personally don't have a strong opinion on which is better, I'd be fine most of the time with lump-sum, but that is my own personal risk tolerance, which is personal, exactly like AA is personal.

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Re: Why is lump sum investment option better than DCA?

Post by bertilak » Wed May 06, 2020 7:15 pm

ososnilknarf wrote:
Wed May 06, 2020 7:07 pm
I disagree with those saying that it is better to lump sum because studies have shown that it has done better 66% of the time. This is like saying that stocks have outperformed bonds X% of the time, so you should ALWAYS put all of your money in stocks. We don't do that because we want to diversify to satisfy our risk tolerance. The same should apply to lump-sum vs DCA, in my opinion. DCA is a form of diversification. You are diversifying buying points in time, instead of gambling it all on a single point in time.

I personally don't have a strong opinion on which is better, I'd be fine most of the time with lump-sum, but that is my own personal risk tolerance, which is personal, exactly like AA is personal.
The "single point in time" that is the most significant is the day the DCA period ends. THAT point in time is the same (undiversified) point you arrive at with lump sum.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

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Re: Why is lump sum investment option better than DCA?

Post by retiredjg » Wed May 06, 2020 7:29 pm

bertilak wrote:
Wed May 06, 2020 7:01 pm
retiredjg wrote:
Wed May 06, 2020 6:57 pm
Definitely DCA from your paycheck on a regular basis.
What are the alternatives?
Some people taking the "lump sum or DCA" discussion too literally might think they should save a chunk of money and then lump sum it into an investment.

Of course, that is not what people should do, but I'm sure some have thought of that after reading that "lump sum is better than DCA".

But mostly, I think some people do not realize that regular investing actually is dollar cost averaging.

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Re: Why is lump sum investment option better than DCA?

Post by vineviz » Wed May 06, 2020 7:38 pm

RJC wrote:
Wed May 06, 2020 2:02 pm
Is DCA better when the market is falling? Say about a month ago?
If you could predict that the market was going to fall over the course of the next month, why would you prefer to DCA into it?

Just wait until it stops falling and invest your lump sum right at the bottom. That should be easy to do, right?
"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: Why is lump sum investment option better than DCA?

Post by nigel_ht » Wed May 06, 2020 7:47 pm

bertilak wrote:
Wed May 06, 2020 7:15 pm
ososnilknarf wrote:
Wed May 06, 2020 7:07 pm
I disagree with those saying that it is better to lump sum because studies have shown that it has done better 66% of the time. This is like saying that stocks have outperformed bonds X% of the time, so you should ALWAYS put all of your money in stocks. We don't do that because we want to diversify to satisfy our risk tolerance. The same should apply to lump-sum vs DCA, in my opinion. DCA is a form of diversification. You are diversifying buying points in time, instead of gambling it all on a single point in time.

I personally don't have a strong opinion on which is better, I'd be fine most of the time with lump-sum, but that is my own personal risk tolerance, which is personal, exactly like AA is personal.
The "single point in time" that is the most significant is the day the DCA period ends. THAT point in time is the same (undiversified) point you arrive at with lump sum.
No. If you DCA was March 1 to April 1 using even amounts every day during that period you captured part of the recent bottom and ended up with a lower cost basis than just jumping in April 1 or March 1 as a lump sum.

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Re: Why is lump sum investment option better than DCA?

Post by nigel_ht » Wed May 06, 2020 7:54 pm

vineviz wrote:
Wed May 06, 2020 7:38 pm
RJC wrote:
Wed May 06, 2020 2:02 pm
Is DCA better when the market is falling? Say about a month ago?
If you could predict that the market was going to fall over the course of the next month, why would you prefer to DCA into it?

Just wait until it stops falling and invest your lump sum right at the bottom. That should be easy to do, right?
You may not be able to predict the bottom but you can observe that the market is either uncertain or in a downward trend.

No prediction is required, just observation. A 12 month DCA through 2020 will likely be better than lump summing based on the observation that the market is volatile and the economic conditions challenged which is historically when DCA outperformed Lump Sum.

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Re: Why is lump sum investment option better than DCA?

Post by Ocean77 » Wed May 06, 2020 8:03 pm

nigel_ht wrote:
Wed May 06, 2020 7:54 pm
vineviz wrote:
Wed May 06, 2020 7:38 pm
RJC wrote:
Wed May 06, 2020 2:02 pm
Is DCA better when the market is falling? Say about a month ago?
If you could predict that the market was going to fall over the course of the next month, why would you prefer to DCA into it?

Just wait until it stops falling and invest your lump sum right at the bottom. That should be easy to do, right?
You may not be able to predict the bottom but you can observe that the market is either uncertain or in a downward trend.

No prediction is required, just observation. A 12 month DCA through 2020 will likely be better than lump summing based on the observation that the market is volatile and the economic conditions challenged which is historically when DCA outperformed Lump Sum.
Or it could be the reverse. Let's say you started investing in January this year, you observed an upward trend, stable economy, non-volatile market etc and decided that lump sum is the way to go. Or you started investing on March 23, observed the downward trend, volatile market and economic instability and decided that DCA was the way to go.

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Re: Why is lump sum investment option better than DCA?

Post by firebirdparts » Wed May 06, 2020 8:19 pm

retiredjg wrote:
Wed May 06, 2020 7:29 pm

Some people taking the "lump sum or DCA" discussion too literally might think they should save a chunk of money and then lump sum it into an investment.

.
My wife said something about it just this morning. She doesn't have a paying job. I told her DCA is for people with a paycheck. She talks like she would benefit from becoming a 'real' market timer. Right now she's one of those All-seeing Zoltar/stomach acid market timers. Luckily she doesn't have much money.
A fool and your money are soon partners

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Re: Why is lump sum investment option better than DCA?

Post by nigel_ht » Wed May 06, 2020 8:29 pm

Ocean77 wrote:
Wed May 06, 2020 8:03 pm
nigel_ht wrote:
Wed May 06, 2020 7:54 pm
vineviz wrote:
Wed May 06, 2020 7:38 pm
RJC wrote:
Wed May 06, 2020 2:02 pm
Is DCA better when the market is falling? Say about a month ago?
If you could predict that the market was going to fall over the course of the next month, why would you prefer to DCA into it?

Just wait until it stops falling and invest your lump sum right at the bottom. That should be easy to do, right?
You may not be able to predict the bottom but you can observe that the market is either uncertain or in a downward trend.

No prediction is required, just observation. A 12 month DCA through 2020 will likely be better than lump summing based on the observation that the market is volatile and the economic conditions challenged which is historically when DCA outperformed Lump Sum.
Or it could be the reverse. Let's say you started investing in January this year, you observed an upward trend, stable economy, non-volatile market etc and decided that lump sum is the way to go. Or you started investing on March 23, observed the downward trend, volatile market and economic instability and decided that DCA was the way to go.
Things were fine in January so the odds were in your favor that lump sum would outperform 12 month DCA. That the odds are in your favor doesn’t mean you automatically win.

Same deal for March 23. The odds are in favor of a DCA because there is still a significant risk of major downturn.

Like Blackjack and counting cards. You can tell whether the deck favors you or the house. Doesn’t mean you will win or lose any particular game.
Last edited by nigel_ht on Wed May 06, 2020 9:32 pm, edited 1 time in total.

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Brianmcg321
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Re: Why is lump sum investment option better than DCA?

Post by Brianmcg321 » Wed May 06, 2020 8:33 pm

The longer your money is in the market the better.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

TropikThunder
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Re: Why is lump sum investment option better than DCA?

Post by TropikThunder » Wed May 06, 2020 9:06 pm

Hedge your bets and do both. I front-load my IRA and HSA as soon as I can in January (lump sum) and the 403b contributions are per paycheck throughout the year (DCA even though it's not the correct usage of the term).

Silk McCue
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Re: Why is lump sum investment option better than DCA?

Post by Silk McCue » Wed May 06, 2020 9:09 pm

We could really use a permanent thread on DCA vs Lump Sum.

Cheers

Triple digit golfer
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Re: Why is lump sum investment option better than DCA?

Post by Triple digit golfer » Wed May 06, 2020 9:27 pm

Silk McCue wrote:
Wed May 06, 2020 9:09 pm
We could really use a permanent thread on DCA vs Lump Sum.

Cheers
Or one of those final definitive threads. Do we have one for this topic?

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Re: Why is lump sum investment option better than DCA?

Post by Silk McCue » Wed May 06, 2020 9:47 pm

Triple digit golfer wrote:
Wed May 06, 2020 9:27 pm
Silk McCue wrote:
Wed May 06, 2020 9:09 pm
We could really use a permanent thread on DCA vs Lump Sum.

Cheers
Or one of those final definitive threads. Do we have one for this topic?
Lol. Yes we do. But I do mean one where these new threads just get appended.

The Final, Definitive Thread on Dollar-Cost Averaging

Cheers

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Re: Why is lump sum investment option better than DCA?

Post by grabiner » Wed May 06, 2020 9:51 pm

ososnilknarf wrote:
Wed May 06, 2020 7:07 pm
I disagree with those saying that it is better to lump sum because studies have shown that it has done better 66% of the time. This is like saying that stocks have outperformed bonds X% of the time, so you should ALWAYS put all of your money in stocks. We don't do that because we want to diversify to satisfy our risk tolerance. The same should apply to lump-sum vs DCA, in my opinion. DCA is a form of diversification. You are diversifying buying points in time, instead of gambling it all on a single point in time.
The difference is that you are not really diversifying risk, just reducing it.

If you currently have no stock, you could put 10% of your portfolio into the market now, and 10% more each month for seven months; this is a common DCA strategy.

If I currently have 80% of my portfolio in stock, I could pull 70% out now, and put 10% back each month for seven months. If I do this, my returns will be the same as yours. Therefore, mathematically, the strategy is right for me if it is right for you. However, nobody ever recommends that strategy for existing investors.

The idea of diversifying risk is to take the same total amount of risk, but to spread it out more over less-dependent factors. For example, US and foreign stocks both have risk, but a portfolio with US and foreign stocks may have less total risk than either individually.

The allocation analogy is to spread the time risk evenly over as many time periods as possible. A market timer who is in the market half the time has the expected returns of a 50%-stock investor, but more risk because he is exposed to 100% of the market risk in half the time periods, rather than 50% of the risk in every time period.
Wiki David Grabiner

Triple digit golfer
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Re: Why is lump sum investment option better than DCA?

Post by Triple digit golfer » Wed May 06, 2020 9:53 pm

Silk McCue wrote:
Wed May 06, 2020 9:47 pm
Triple digit golfer wrote:
Wed May 06, 2020 9:27 pm
Silk McCue wrote:
Wed May 06, 2020 9:09 pm
We could really use a permanent thread on DCA vs Lump Sum.

Cheers
Or one of those final definitive threads. Do we have one for this topic?
Lol. Yes we do. But I do mean one where these new threads just get appended.

The Final, Definitive Thread on Dollar-Cost Averaging

Cheers
Yes! Can't wait to read it!

Silk McCue
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Re: Why is lump sum investment option better than DCA?

Post by Silk McCue » Wed May 06, 2020 9:56 pm

Triple digit golfer wrote:
Wed May 06, 2020 9:53 pm
Yes! Can't wait to read it!
Thanks for playing the straight man and setting this up.

Cheers

tibbitts
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Re: Why is lump sum investment option better than DCA?

Post by tibbitts » Wed May 06, 2020 9:59 pm

RJC wrote:
Wed May 06, 2020 2:02 pm
Is DCA better when the market is falling? Say about a month ago?
Nobody knows when the market "is" falling, so that's not a reasonable question.

Ocean77
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Re: Why is lump sum investment option better than DCA?

Post by Ocean77 » Wed May 06, 2020 10:00 pm

nigel_ht wrote:
Wed May 06, 2020 8:29 pm
Ocean77 wrote:
Wed May 06, 2020 8:03 pm
nigel_ht wrote:
Wed May 06, 2020 7:54 pm
vineviz wrote:
Wed May 06, 2020 7:38 pm
RJC wrote:
Wed May 06, 2020 2:02 pm
Is DCA better when the market is falling? Say about a month ago?
If you could predict that the market was going to fall over the course of the next month, why would you prefer to DCA into it?

Just wait until it stops falling and invest your lump sum right at the bottom. That should be easy to do, right?
You may not be able to predict the bottom but you can observe that the market is either uncertain or in a downward trend.

No prediction is required, just observation. A 12 month DCA through 2020 will likely be better than lump summing based on the observation that the market is volatile and the economic conditions challenged which is historically when DCA outperformed Lump Sum.
Or it could be the reverse. Let's say you started investing in January this year, you observed an upward trend, stable economy, non-volatile market etc and decided that lump sum is the way to go. Or you started investing on March 23, observed the downward trend, volatile market and economic instability and decided that DCA was the way to go.
Things were fine in January so the odds were in your favor that lump sum would outperform 12 month DCA. That the odds are in your favor doesn’t mean you automatically win.

Same deal for March 23. The odds are in favor of a DCA because there is still a significant risk of major downturn.

Like Blackjack and counting cards. You can tell whether the deck favors you or the house. Doesn’t mean you will win or lose any particular game.
Or maybe odds are in your favor with a lump sum investment just when things look very bleak. You know the saying, be fearful when others are greedy, and vice versa.

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Re: Why is lump sum investment option better than DCA?

Post by tibbitts » Wed May 06, 2020 10:05 pm

bg5 wrote:
Wed May 06, 2020 1:33 pm
I am confused a bit about why people feel lump sum investment is a better option than DCA.

Any feedback on this would be helpful.

I would just think that the DCA option would be safer so you are not putting all your eggs in one basket and if you invest over time it would appear to me to be more conservative vs. the risky invest it all at one time
Why is this confusing? You've already stated that DCA is in some respects more conservative. Yet you've read this forum enough to see all the "why not 100% equity" threads. So why would you assume that everyone's objective would be "more conservative" investing? In your own mind you seem to have conflated "better" with "more conservative."

bog419
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Re: Why is lump sum investment option better than DCA?

Post by bog419 » Thu May 07, 2020 8:19 am

cos wrote:
Wed May 06, 2020 6:36 pm
bog419 wrote:
Wed May 06, 2020 6:15 pm
It's like a a russian roulette with 3 holes and one bullet. One never wants to play such a game, especially now.
So you'd rather play Russian roulette with three holes and two bullets? How is that better?
No actually that doesn't work the way around and you know it for sure.
DCA is not a headshot by definition, you understand that, lumpsum is, so the analogy fits perfectly.
Were you among those who gave advice to lumpsum an absurd amount of money back in february at ATH after a 12 years bull markets and +30% in a few months of "everything bubble" ?

I'm saving this guy a lot of money, because BS study or not you still have 33% to fail miserably whith lump sum, and one has to understand that this rate is based on value, so right now with the current hysterical market and trash economy the odd might be more 80% expected failure.

Don't do it.

Oh, hey guys please do not get the same mistake everytime, we are talking about LUMP SUM vs DCA, not sending a percentage of your monthly paycheck in the market which is not DCA but actually lumpsuming, even if by the fact that is small values in regular periods get the perceived effect of DCAing.

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