Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by adherenceEnergy »

wolf359 wrote: Wed Jun 03, 2020 9:06 am The real fallacy is that mental accounting has no value. As Dave Ramsey has shown, psychology can play an enormous role in success.
I think this train of thought misses the point of the argument. I think many people are open to logic, but many people don't realize that dca is entirely illogical and think it's a rational form of insurance. If someone said I like to have 100k in an emergency fund and carry 30k in credit card debt, because I like having a bigger emergency fund, should you not try to explain why it's illogical? Yes, maybe they won't be receptive, but it's worth a shot to allow people to overcome illogical decisions, no? Maybe your argument is that dca is a small enough mistake that it's not worth attempting to explain why it's irrational, and I can probably accept that. I probably wouldn't bother trying to explain that dca is a mistake to a noobie investor that just got a huge inheritance, but I see many long-time investors dca that actively attempt to make logical decisions, so I think it's worth explaining to them why dca is illogical, as it's not readily explained in the literature.
Last edited by adherenceEnergy on Wed Jun 03, 2020 9:46 am, edited 1 time in total.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by alluringreality »

bertilak wrote: Wed Jun 03, 2020 9:38 am deciding on what the topic is: Actual improvement of investment results vs. making decisions based on a misunderstanding of the potential results.
I'm not sure why it might make sense to continue this interaction, since I tend to doubt it's possible to necessarily determine results in advance, but I do think that much of the preference for lump-sum stock investment on this forum seems to have an underlying element of performance chasing surrounding it.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by sailaway »

adherenceEnergy wrote: Wed Jun 03, 2020 9:44 am
wolf359 wrote: Wed Jun 03, 2020 9:06 am The real fallacy is that mental accounting has no value. As Dave Ramsey has shown, psychology can play an enormous role in success.
I think this train of thought misses the point of the argument. I think many people are open to logic, but many people don't realize that dca is entirely illogical and think it's a rational form of insurance. If someone said I like to have 100k in an emergency fund and carry 30k in credit card debt, because I like having a bigger emergency fund, should you not try to explain why it's illogical? Yes, maybe they won't be receptive, but it's worth a shot to allow people to overcome illogical decisions, no? Maybe your argument is that dca is a small enough mistake that it's not worth attempting to explain why it's irrational, and I can probably accept that. I probably wouldn't bother trying to explain that dca is a mistake to a noobie investor that just got a huge inheritance, but I see many long-time investors dca that actively attempt to make logical decisions, so I think it's worth explaining to them why dca is illogical, as it's not readily explained in the literature.
Every single thread here points out that lump sum is usually better. People who still want to DCA after reading that are looking for comfort, which isn't always logical, but is very important when making decisions.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by bertilak »

adherenceEnergy wrote: Wed Jun 03, 2020 9:44 am
wolf359 wrote: Wed Jun 03, 2020 9:06 am The real fallacy is that mental accounting has no value. As Dave Ramsey has shown, psychology can play an enormous role in success.
I think this train of thought misses the point of the argument. I think many people are open to logic, but many people don't realize that dca is entirely illogical and think it's a rational form of insurance.
You got it.

One should NOT argue that because people's misconception might make them feel safer that the misconception should be excused, or even encouraged. This seems to be a big part of the pro-DCA contingent.

My understanding is that the point of "behavioral science" is to help people AVOID making irrational decisions by recognizing one's susceptibility to those tendencies -- not to justify those tendencies. Well, it could ALSO be a way to help one take advantage of OTHER people's irrational behavior! Better not to be one of those other people! I can only think of one way to profit from this -- write pro-DCA articles to get lots of mouse clicks. People crave feel-good inbestment advice. It seems that vein has already been heavily mined!
Last edited by bertilak on Wed Jun 03, 2020 10:01 am, edited 1 time in total.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by adherenceEnergy »

EnjoyIt wrote: Wed Jun 03, 2020 9:41 am What you are saying if I understand this properly is that one should refinance every few years and pull cash out of their house to invest or not hold any debt at all. Otherwise there is mental fallacy involved. Slowly paying down debt while holding bonds is irrational. Is that correct?
I'm saying that if you are borrowing at a static 4ish% to invest at variable 4ish%, it's probably not going to increase the risk/reward of your portfolio, so leveraging to hold bonds is probably a mistake on its own. If you were, to say, borrow at 4% to invest at a variable 8%, and slowly deleverage over time by paying down your mortgage, that's fine if you have a higher risk tolerance. If you've decided 120% is an optimal stock allocation, and it veers down to 110%, it's better to get it back to your target stock allocation of 120%, but it doesn't mean it's wrong to only have 110% leverage, just less good according to your desired risk/reward.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by bertilak »

alluringreality wrote: Wed Jun 03, 2020 9:46 am
bertilak wrote: Wed Jun 03, 2020 9:38 am deciding on what the topic is: Actual improvement of investment results vs. making decisions based on a misunderstanding of the potential results.
I'm not sure why it might make sense to continue this interaction, since I tend to doubt it's possible to necessarily determine results in advance, but I do think that much of the preference for lump-sum stock investment on this forum seems to have an underlying element of performance chasing surrounding it.
There's that "seems" again. Could be a misconception. The closest I have seen to that is when DCA is touted to improve performance by "buying more shares at a lower price than a higher price." Sounds good but careful math shows it to be a fallacy. Also, the full discussion takes into account the undetermined nature of the future.
Last edited by bertilak on Wed Jun 03, 2020 10:10 am, edited 2 times in total.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Fallible »

\
adherenceEnergy wrote: Wed Jun 03, 2020 9:44 am
wolf359 wrote: Wed Jun 03, 2020 9:06 am The real fallacy is that mental accounting has no value. As Dave Ramsey has shown, psychology can play an enormous role in success.
I think this train of thought misses the point of the argument. I think many people are open to logic, but many people don't realize that dca is entirely illogical and think it's a rational form of insurance. If someone said I like to have 100k in an emergency fund and carry 30k in credit card debt, because I like having a bigger emergency fund, should you not try to explain why it's illogical? Yes, maybe they won't be receptive, but it's worth a shot to allow people to overcome illogical decisions, no? Maybe your argument is that dca is a small enough mistake that it's not worth attempting to explain why it's irrational, and I can probably accept that. I probably wouldn't bother trying to explain that dca is a mistake to a noobie investor that just got a huge inheritance, but I see many long-time investors dca that actively attempt to make logical decisions, so I think it's worth explaining to them why dca is illogical, as it's not readily explained in the literature.
Since this thread is well within the realm of behavioral finance, I think an important reply to the above posts is this from Hersh Shefrin, author, economist, and a pioneer in the behavioral approach to economics and finance:
There are some aspects of mental accounting that are detrimental to accumulating retirement wealth, and other aspects that are helpful. Mental accounting can lead people to invest too conservatively by causing them to suffer from myopic loss aversion. At the same time, mental accounting can be constructively used to distinguish different categories of wealth, thereby helping people both to save money and thereafter to safeguard that money from being injudiciously spent.

Dollar-cost averaging is intriguing from a behavioral perspective. It combines the cultivation of good savings habits to deal with temptation, framing effects that reduce the pain of loss, and conventionality that mitigates feelings of regret.”
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by adherenceEnergy »

sailaway wrote: Wed Jun 03, 2020 9:53 am Every single thread here points out that lump sum is usually better. People who still want to DCA after reading that are looking for comfort, which isn't always logical, but is very important when making decisions.
They argue it's usually better, but for a different reason than I'm arguing though. The arguments I typically see in favor of lump sum is that the performance is better 68% of the time, but it's a little riskier. They don't say lump sum is better because dca makes 0 logical sense as a hedging strategy. That's the point of highlighting the logic. People on the fence that are open to logic and are trying to decide which one to pick, should be aware of the behavioral economic bias which would lead one to dca, so they can more comfortably accept the risk involved with lump sum. Logic can provide comfort too. Logic has certainly helped me emotionally to more comfortably accept stock market fluctuations and not panic sell when the market dips. Logic has helped me emotionally accept the risks involved with lump sum investments. I don't see any reason to believe explaining exactly why dca is illogical would not provide emotional benefit to someone trying to decide which one to pick.

It's similar to snowball vs avalanche. Both strategies have merit, but if you think you are capable of being logical about it, it's good to know that avalanche is logically superior, but behaviorally harder to handle. But just because snowball is behaviorally better, doesn't mean explaining the logic behind avalanche has no merit emotionally.
Last edited by adherenceEnergy on Wed Jun 03, 2020 10:33 am, edited 11 times in total.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by sailaway »

bertilak wrote: Wed Jun 03, 2020 9:54 am
adherenceEnergy wrote: Wed Jun 03, 2020 9:44 am
wolf359 wrote: Wed Jun 03, 2020 9:06 am The real fallacy is that mental accounting has no value. As Dave Ramsey has shown, psychology can play an enormous role in success.
I think this train of thought misses the point of the argument. I think many people are open to logic, but many people don't realize that dca is entirely illogical and think it's a rational form of insurance.
You got it.

One should NOT argue that because people's misconception might make them feel safer that the misconception should be excused, or even encouraged. This seems to be a big part of the pro-DCA contingent.

My understanding is that the point of "behavioral science" is to help people AVOID making irrational decisions by recognizing one's susceptibility to those tendencies -- not to justify those tendencies. Well, it could ALSO be a way to help one take advantage of OTHER people's irrational behavior! Better not to be one of those other people! I can only think of one way to profit from this -- write pro-DCA articles to get lots of mouse clicks. People crave feel-good inbestment advice. It seems that vein has already been heavily mined!
Not at all. Behavioral science is usually about finding a balance where people will actually participate in an activity that moves their goals forward, rather than engaging in all or nothing/ best or worst false dichotomies that keep them from changing at all. Snowball debt payments aren't the best, but they are better than burying your head in the sand. Bucket strategies aren't the best, but they are better than no strategy. Starting with small retirement savings and automatically increasing once a year isn't as good as chucking it all in while you are young, but it is more likely to happen.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by KEotSK66 »

re vg managed payout funds

went public within a week of the start of the 2007 crash

these funds (fund now ?) have been plagued by problems over the years but out of the gate lump-summers paid a price for a number of years
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by bertilak »

sailaway wrote: Wed Jun 03, 2020 10:11 am Not at all. ...
I've had my say. I'm moving on!
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Adonis »

adherenceEnergy wrote: Wed Jun 03, 2020 7:44 am
Adonis wrote: Wed Jun 03, 2020 2:34 am There you have it. To you minimizing the emotional risk of feeling deep regret is not a valid reason; it is not a sensible thing to do. Marginally better expected returns, 66% of the time, is a sufficient reason to completely dismiss emotions.

How many times does one have to ask what risk do you think is being mitigated? It really is like buying insurance.
When I buy house insurance, I typically have a relatively static view: do I want to protect my house? Answer = yes, so I buy insurance during the life of my home ownership. I don't think it's particularly rational to buy insurance during the first month or two of home ownership, because you don't want your down payment money to go up in flames, then no longer buy insurance on the house once you're comfortable with the idea of your down payment money going up in flames. That is what DCA does. You're only protecting against loss during the small timeframe where you buy it for, and it's a really inefficient method of insurance. You should generally think insurance is good for the life of the product unless something substantially changes. If you think DCA is a good insurance product, you should probably keep doing it after you've finished dca back in, as I do with my home insurance.
People like me have said it is equivalent to buying insurance but we haven’t clarified what that meant. I said it wasn’t like mandatory insurance but I didn’t think anyone would twist things like this. So I guess I have to further clarify. It is like buying an extended warranty insurance. It is time limited. Think of doubling your manufacturer warranty on the TV. Or buying the extended warranty for your vehicle. The vast majority of the time it is wasted money. You are buying convenience and peace of mind though, accepting that from a purely financial standpoint you would save money long term if you never bought these kinds of products. The idea that the only insurance that is reasonable is the kind that could be purchased for a life time term is disingenuous.
I'm not opposed to insurance, but I try to buy efficient insurance products like term life for 30 years vs whole life for 1-2 months. You know I care about portfolio insurance, because I keep bonds in my portfolio, as bonds are the real insurance and part of an appropriate asset allocation.

I get that you're buying "emotional insurance", but I think many people when they actually understand what type of insurance product they're buying can do without. Just like they can do without the emotional insurance of selling on every dip to protect against further downside. I think it's pretty weird to have a discussion with someone trying to rationally explain they like buying an irrational insurance product.
You are begging the question. The issue at hand is whether or not this form of mental accounting is fallacious. You are clearly arguing it is, but you can’t assume the opposing view is irrational, you must prove it. So far you haven’t done so. I have pointed out why the two scenarios are not analogous. There were multiple reasons provided. You keep harping on about logic this or that but I am not sure you know what logic means. There has been no formal logical mistake presented so far, and the informal aspect is what is under contention.
If the answer is "I know this makes no rational sense to buy this insurance but it makes me feel better", then okay, I guess that's the right decision for you. If I told you "I know it makes no rational sense to buy insurance on my celery for dinner tonight, but it makes me feel great", how are you supposed to argue against that? My point was raising awareness for people that might not realize it's an irrational insurance product so people on the fence and open to logic could not buy it.
I’m open to logic and criticism. I value being wrong because it gives me an opportunity to learn and grow, but don’t expect me to concede a point unless you actually convinced me, and don’t expect me to pursue the discussion if you start to become insulting.
Last edited by Adonis on Wed Jun 03, 2020 11:05 am, edited 1 time in total.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by tadamsmar »

adherenceEnergy wrote: Mon Jun 01, 2020 1:43 pm I think DCA makes 0 sense in any circumstance and is an entirely a mental accounting bias. Let's say today you had 300k in an 80/20 portfolio. Would you ever think, now is the time to take less risk, pull 200k out, and slowly put it back in? That's equivalent to having a 100k 80/20 portfolio and getting a 200k windfall and DCA the windfall. If you wouldn't randomly take 200k out of equities and DCA back in, why would you do that in the windfall scenario? The only difference is feeling that "this particular amount of money has less risk" but money is fungible, so why would that be important?

I think it should be never used, as it's only benefit is to make you feel better because you don't understand the mental accounting bias at play.

Am I missing something? Any other thoughts?
One thing you are missing is that there are more than 2 options. A 3rd option is never investing the lump sum.

Proponents of DCA say that it is better than not investing at all. The idea is that there is a type of investor who can get into the market using DCA of a lump sum and then live happily ever after.

Note that the type of investor evidences multiple inconsistencies. They have to think putting in the lump sum is too scary to do, and then they have to DCA over a period. At the end of the period (perhaps a year), they have the lump sum invested but they somehow have supposedly lost their fear of having it fully invested!
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Adonis »

rbaldini wrote: Wed Jun 03, 2020 9:21 am
Adonis wrote: Wed Jun 03, 2020 2:05 am You say it isn’t the point but that is precisely the point of DCA. If you suddenly won 1,000,000$ tomorrow even though you might want to invest it for the long haul and adopt a buy and hold strategy, you are deluding yourself if you think you wouldn’t second guess dumping it all in right now amidst all the current turmoil. DCA in over a few years might mean missing on some nice returns for a few years, but it would mean waiting things out in case the markets tank again and what we are witnessing is a dead cat bounce from March. Global pandemics are a once in a life time event. Look at the research and ask yourself when and under what circumstances does DCA outperform LS? It isn’t when things are quiet and running like normal, it is usually under extreme circumstances.
As others have said, DCA is a logically inconsistent strategy for risk minimization. I don't know how else to explain this to you. What is a logically consistent way to do it? Increased allocation to bonds is one. In other words, if current volatility makes you queasy, increase your bond allocation. One should do this whether their $1mil came from a windfall or from 20 years of hard work.
Well, let’s start by defining the risk. Furthermore who said in this thread it was a good strategy to minimize market risk? If the risk is emotional, then neither you nor anyone else has shown it is an inconsistent strategy for minimizing feelings of regret. But if you are claiming it is a bad strategy to minimize market risk, then pointing that fact out is irrelevant since no one is claiming that in the first place. Nothing needs to be explained. You are playing with straws.
Adonis wrote: Wed Jun 03, 2020 2:05 am Furthermore the idea that a dollar is just a dollar is ludicrous. There is a qualitative difference between a million dollars and ten dollars.
This is comical.
Glad that I amuse you. Care to actually bother refuting the point?
Adonis wrote: Wed Jun 03, 2020 2:05 am Finally you point out that the OP and other criticisms aren’t addressing my points, well perhaps so, but that is why they are beating up on a straw man. Ask people who use DCA why they are doing it and then if you think that reasoning is flawed, address it.
You are the one beating a straw man. The OP made a cogent point. You are harping on about a separate issue (risk mitigation vs expected return), evidently incapable of understanding the simple point despite attempts by many to help you do so.
I am responding to the commentary that came out of the OP’s point. I am telling you why I am following a DCA strategy. I may well be pursuing an idiotic strategy, I may well be irrational or engaged in mental accounting fallacies or biases, but if that is your claim, I do expect you to defend your point when challenged. I am telling you why I am doing what I am doing, the burden of proof is on you to show me why what I am doing is wrong or inadvisable. To assume my motivations are for reasons that I do not endorse is not a good way to achieve that goal. If your goal is to demonstrate DCA is never advisable you must then show why what I am doing is wrong. It doesn’t matter what the OP said or assumed.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by Adonis »

tadamsmar wrote: Wed Jun 03, 2020 10:48 am
adherenceEnergy wrote: Mon Jun 01, 2020 1:43 pm I think DCA makes 0 sense in any circumstance and is an entirely a mental accounting bias. Let's say today you had 300k in an 80/20 portfolio. Would you ever think, now is the time to take less risk, pull 200k out, and slowly put it back in? That's equivalent to having a 100k 80/20 portfolio and getting a 200k windfall and DCA the windfall. If you wouldn't randomly take 200k out of equities and DCA back in, why would you do that in the windfall scenario? The only difference is feeling that "this particular amount of money has less risk" but money is fungible, so why would that be important?

I think it should be never used, as it's only benefit is to make you feel better because you don't understand the mental accounting bias at play.

Am I missing something? Any other thoughts?
One thing you are missing is that there are more than 2 options. A 3rd option is never investing the lump sum.

Proponents of DCA say that it is better than not investing at all. The idea is that there is a type of investor who can get into the market using DCA of a lump sum and then live happily ever after.

Note that the type of investor evidences multiple inconsistencies. They have to think putting in the lump sum is too scary to do, and then they have to DCA over a period. At the end of the period (perhaps a year), they have the lump sum invested but they somehow have supposedly lost their fear of having it fully invested!
You think current worldwide market conditions are business as usual? When was the last time there were 20 million people going on unemployment in a single month in the US? When was the last time we had a global pandemic of this magnitude (answer 1917)? When was the last time we had quantitative easing on this scale on a global spectrum? I could go on, but ya though I am not saying this time is different I am saying things are very precarious right now and it isn’t unreasonable to expect clearer skies in a year or two, especially after we have a vaccine and have seen the true fall out from these lockdowns and riots. 1/3 of the time DCA beat LS. What did those 1/3 times look like?
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Adonis »

bertilak wrote: Wed Jun 03, 2020 10:19 am
sailaway wrote: Wed Jun 03, 2020 10:11 am Not at all. ...
I've had my say. I'm moving on!
I think I might do the same, it is starting to feel as if people are talking past each other rather than engaging the actual points being made.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by EnjoyIt »

Adonis wrote: Wed Jun 03, 2020 11:15 am
bertilak wrote: Wed Jun 03, 2020 10:19 am
sailaway wrote: Wed Jun 03, 2020 10:11 am Not at all. ...
I've had my say. I'm moving on!
I think I might do the same, it is starting to feel as if people are talking past each other rather than engaging the actual points being made.
OP is 100% accurate in their assessment. Despite that, if you understand the fallacy and willing to accept that expected returns will be lower by DCA so that you have the psychological fortitude to contribute into the market over a short DCA period, I see little harm in that. I would still urge you to re-evaluate your desired AA because it very well may be that your desired AA is to risky for you which is probably why you are choosing to delay getting there via DCA.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by adherenceEnergy »

Adonis wrote: Wed Jun 03, 2020 10:45 am People like me have said it is equivalent to buying insurance but we haven’t clarified what that meant. I said it wasn’t like mandatory insurance but I didn’t think anyone would twist things like this. So I guess I have to further clarify. It is like buying an extended warranty insurance. It is time limited. Think of doubling your manufacturer warranty on the TV. Or buying the extended warranty for your vehicle. The vast majority of the time it is wasted money. You are buying convenience and peace of mind though, accepting that from a purely financial standpoint you would save money long term if you never bought these kinds of products. The idea that the only insurance that is reasonable is the kind that could be purchased for a life time term is disingenuous
I wasn't clear with my words. I included "unless something substantially changes," but I'll expand on that idea for clarity. On an appreciating asset like a house, if you want insurance in the beginning, you should generally also want insurance once there's even more to lose, as nothing has substantially changed, agreed? A time limited insurance policy can make rational sense, in the example of an extended warranty. For an extended warranty, you can rationally deem that it's still worth insuring after the manufacturers warranty is up, because that risk is still too great for you. Nothing has really substantially changed, you still want your engine covered. On a depreciating asset, the value of the asset can make something substantially change, ie. there comes a point where it no longer makes sense to insure the product, because it's worth so little, or your net worth has grown. I used to carry comprehensive and collision on my car, now I can afford that risk so I don't, something has substantially changed. If you want insurance on your portfolio in the first 2 months, you should generally also want insurance once it's even larger and the risks are even greater, right? What has substantially changed?
Last edited by adherenceEnergy on Wed Jun 03, 2020 11:57 am, edited 2 times in total.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Adonis »

EnjoyIt wrote: Wed Jun 03, 2020 11:21 am
Adonis wrote: Wed Jun 03, 2020 11:15 am
bertilak wrote: Wed Jun 03, 2020 10:19 am
sailaway wrote: Wed Jun 03, 2020 10:11 am Not at all. ...
I've had my say. I'm moving on!
I think I might do the same, it is starting to feel as if people are talking past each other rather than engaging the actual points being made.
OP is 100% accurate in their assessment. Despite that, if you understand the fallacy and willing to accept that expected returns will be lower by DCA so that you have the psychological fortitude to contribute into the market over a short DCA period, I see little harm in that. I would still urge you to re-evaluate your desired AA because it very well may be that your desired AA is to risky for you which is probably why you are choosing to delay getting there via DCA.
Back in August of last year I told you all I wanted to go about 60/40 AA. I told you I was nervous doing LS. People on this board recommended I DCA. In March when the markets dropped 37% I can tell you I was extremely glad I didn’t go all in in August. I can tell you from personal experience that would have been devastating. I was, and continue to be, extremely glad I did choose DCA. Now the markets have recovered quite a bit. I missed the opportunity to buy all in at the 37% drop. I don’t know if we are in a dead cat bounce or not, but if not, I will continue to DCA in until I hit my target 60/40. If there is another major drop, this time I will be ready to pounce on it and won’t have the remainder of my windfall tied up. I was shocked at how fast the market both dropped and recovered. I think it was a historical record on both fronts.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by vineviz »

Adonis wrote: Wed Jun 03, 2020 11:03 amI am responding to the commentary that came out of the OP’s point. I am telling you why I am following a DCA strategy. I may well be pursuing an idiotic strategy, I may well be irrational or engaged in mental accounting fallacies or biases, but if that is your claim, I do expect you to defend your point when challenged. I am telling you why I am doing what I am doing, the burden of proof is on you to show me why what I am doing is wrong or inadvisable.
For what it's worth, I think it's clear that your strategy is neither irrational nor inadvisable. Any charge that it is irrational is likely based on an incomplete understanding of economic principles.

It is common for classically trained economists to make the implicit assumption that rational actors care ONLY about monetary or pecuniary benefits, but this is not so. A rational investor will seek not to maximize their expected return, but rather to maximize their expected utility. If the investor is highly regret averse (as you seem to describe yourself as being) it may entirely rational to choose an action that trades a reduction in expected return (the cost) for a reduction in anticipated regret (the benefit).

That's not to say that no emotionally driven investment decision is irrational, and many certainly are. This particular decision, it seems to me, is merely a reflection that you value a marginal avoidance of regret over higher expected marginal wealth.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Adonis
Posts: 88
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Adonis »

adherenceEnergy wrote: Wed Jun 03, 2020 11:46 am
Adonis wrote: Wed Jun 03, 2020 10:45 am People like me have said it is equivalent to buying insurance but we haven’t clarified what that meant. I said it wasn’t like mandatory insurance but I didn’t think anyone would twist things like this. So I guess I have to further clarify. It is like buying an extended warranty insurance. It is time limited. Think of doubling your manufacturer warranty on the TV. Or buying the extended warranty for your vehicle. The vast majority of the time it is wasted money. You are buying convenience and peace of mind though, accepting that from a purely financial standpoint you would save money long term if you never bought these kinds of products. The idea that the only insurance that is reasonable is the kind that could be purchased for a life time term is disingenuous
I wasn't clear with my words. I included "unless something substantially changes," but I'll expand on that idea for clarity. On an appreciating asset like a house, if you want insurance in the beginning, you should generally also want insurance once there's even more to lose, as nothing has substantially changed, agreed? A time limited insurance policy can make rational sense, in the example of an extended warranty. For an extended warranty, you can rationally deem that it's still worth insuring after the manufacturers warranty is up, because that risk is still too great for you. Nothing has really substantially changed, you still want your engine covered. On a depreciating asset, the value of the asset can make something substantially change, ie. there comes a point where it no longer makes sense to insure the product, because it's worth so little, or your net worth has grown. I used to carry comprehensive and collision on my car, now I can afford that risk so I don't, something has substantially changed. If you want insurance on your portfolio in the first 2 months, you should generally also want insurance once it's even larger and the risks are even greater, right? What has substantially changed?
If we were completely blind to the current economic cycle then I agree nothing has changed. But if I live in a geographical region where on average every 10 years a hurricane rolls through, and the last one was 15 years ago, I may be more inclined to purchase insurance than if the hurricane just hit a few months ago. I don’t think there is anything irrational in that.
Adonis
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Adonis »

vineviz wrote: Wed Jun 03, 2020 12:04 pm
Adonis wrote: Wed Jun 03, 2020 11:03 amI am responding to the commentary that came out of the OP’s point. I am telling you why I am following a DCA strategy. I may well be pursuing an idiotic strategy, I may well be irrational or engaged in mental accounting fallacies or biases, but if that is your claim, I do expect you to defend your point when challenged. I am telling you why I am doing what I am doing, the burden of proof is on you to show me why what I am doing is wrong or inadvisable.
For what it's worth, I think it's clear that your strategy is neither irrational nor inadvisable. Any charge that it is irrational is likely based on an incomplete understanding of economic principles.

It is common for classically trained economists to make the implicit assumption that rational actors care ONLY about monetary or pecuniary benefits, but this is not so. A rational investor will seek not to maximize their expected return, but rather to maximize their expected utility. If the investor is highly regret averse (as you seem to describe yourself as being) it may entirely rational to choose an action that trades a reduction in expected return (the cost) for a reduction in anticipated regret (the benefit).

That's not to say that no emotionally driven investment decision is irrational, and many certainly are. This particular decision, it seems to me, is merely a reflection that you value a marginal avoidance of regret over higher expected marginal wealth.
Exactly how I feel and very well said.
Topic Author
adherenceEnergy
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by adherenceEnergy »

Adonis wrote: Wed Jun 03, 2020 12:09 pm If we were completely blind to the current economic cycle then I agree nothing has changed. But if I live in a geographical region where on average every 10 years a hurricane rolls through, and the last one was 15 years ago, I may be more inclined to purchase insurance than if the hurricane just hit a few months ago. I don’t think there is anything irrational in that.
If you are trying to argue dca is rational for a market timer that also dca frequently, that's not really the argument I'm making. My argument is basically it's illogical to dca a windfall while also being a buy and hold investor. If everytime you get scared based on the current economic climate and want to sell to cash and dca back in, then that doesn't refute my argument in OP where I said:
If you wouldn't randomly take 200k out of equities and DCA back in, why would you do that in the windfall scenario?


If you would take 200k out of stocks and dca back in whenever you felt like, I agree I didn't prove it's illogical to also dca a windfall. Randomly might have been a poor/misleading term to choose, because I was operating under the assumption most here believe they can't predict the market so buying and selling is essentially random for them.
EnjoyIt
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by EnjoyIt »

Adonis wrote: Wed Jun 03, 2020 11:53 am
EnjoyIt wrote: Wed Jun 03, 2020 11:21 am
Adonis wrote: Wed Jun 03, 2020 11:15 am
bertilak wrote: Wed Jun 03, 2020 10:19 am
sailaway wrote: Wed Jun 03, 2020 10:11 am Not at all. ...
I've had my say. I'm moving on!
I think I might do the same, it is starting to feel as if people are talking past each other rather than engaging the actual points being made.
OP is 100% accurate in their assessment. Despite that, if you understand the fallacy and willing to accept that expected returns will be lower by DCA so that you have the psychological fortitude to contribute into the market over a short DCA period, I see little harm in that. I would still urge you to re-evaluate your desired AA because it very well may be that your desired AA is to risky for you which is probably why you are choosing to delay getting there via DCA.
Back in August of last year I told you all I wanted to go about 60/40 AA. I told you I was nervous doing LS. People on this board recommended I DCA. In March when the markets dropped 37% I can tell you I was extremely glad I didn’t go all in in August. I can tell you from personal experience that would have been devastating. I was, and continue to be, extremely glad I did choose DCA. Now the markets have recovered quite a bit. I missed the opportunity to buy all in at the 37% drop. I don’t know if we are in a dead cat bounce or not, but if not, I will continue to DCA in until I hit my target 60/40. If there is another major drop, this time I will be ready to pounce on it and won’t have the remainder of my windfall tied up. I was shocked at how fast the market both dropped and recovered. I think it was a historical record on both fronts.
Although I haven’t checked I think if you would have lumped sum in August you would have been in much better shape today. That is if you held onto that investment when the crash came in March. Today it sounds like you are 40/60 or maybe 50/50 on your way to eventually get to 60/40. The fact that you are delaying being at 60/40 today one might say that maybe you are uncomfortable being at 60/40 which is why you are not there yet. I would suggest revisiting your desired asset allocation at this point and see if maybe 40/60 or 50/50 is right for you. Keep it for a year or two. See how it feels and then reevaluate if you should go to 60/40 because you are now more comfortable than you currently are today.

I am going with the assumption that no one can predict what will happen in the market over the next few months, years, or decades. That includes if we will have a rebound in COVID cases considering all those people protesting together, vs maybe a vaccine arriving by the end of the year and we will be business as usual thereafter.

Again, I am not chastising your for your choices because last August it was do nothing vs DCA and DCA is better than doing nothing. Now that we are 10 months later, you have some experience, maybe it is worth revisiting your plan with your new gained knowledge and market experience. Who knows maybe DCA is still psychologically the best decision for you. There is nothing wrong with forgoing expected returns if it allows you to stay the course better. In essence that is what having a bond allocation does for an investor.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
Adonis
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Adonis »

adherenceEnergy wrote: Wed Jun 03, 2020 12:41 pm
Adonis wrote: Wed Jun 03, 2020 12:09 pm If we were completely blind to the current economic cycle then I agree nothing has changed. But if I live in a geographical region where on average every 10 years a hurricane rolls through, and the last one was 15 years ago, I may be more inclined to purchase insurance than if the hurricane just hit a few months ago. I don’t think there is anything irrational in that.
If you are trying to argue dca is rational for a market timer that also dca frequently, that's not really the argument, I'm making. My argument is basically it's illogical to dca a windfall and be a buy and hold investor. If everytime you get scared based on the current economic climate and want to sell to cash and dca back in, then that doesn't refute my argument in OP where I said:
If you wouldn't randomly take 200k out of equities and DCA back in, why would you do that in the windfall scenario?


If you would take 200k randomly out and dca back in, I agree it's not illogical to also dca a windfall. Randomly might have been a misleading term to choose, because I was operating under the assumption most here believe they can't beat the market and buying and selling is essentially random for them.
First I appreciate you pushing me for greater clarity and making insightful and thought provoking posts. Second, I am not trying to argue that DCA makes sense for a market timer, I am trying to make the opposite point actually, that DCA into the market is not market timing whereas taking money out, like with the 200k example, is market timing.

First off, do we have any way of knowing where we stand currently? Not with absolute certainty no. No one can tell you where the bottom or top is. But we generally can tell if we are closer to the beginning or end of a bull market. The last bull, which was the longest historically by some measures, just ended due to a global pandemic. We don’t know if we are in the beginning or end of the bear. What does that tell us, as far as the markets are concerned? Well, we are in a time of great precariousness. Why does that matter? Because it is completely normal to be worried about the current state of the market. Anyone who isn’t uncertain with the current state of affairs isn’t paying attention. If you suddenly had a windfall, the natural question to ask would be what is the rush to jump in? What is the big deal with waiting a little while until the dust settles? The goal isn’t to beat the market. Actually it is quite the opposite, it is to avoid emotional turmoil for the sake of a small opportunity cost. You are intentionally losing to the market! Well not exactly, you have a 1/3 chance of beating it. Either way your odds of beating the market are low.

Second, market timing by contrast involves trying to beat the market by predicting where it will go. You take out your money from the market with the goal of putting it back in when you think circumstances will be better. People like me who DCA are not doing that. Now if someone inherited a 300k portfolio and pulled 200k out, one time, at the beginning of their investing term, then sure there is no difference, it is just run of the mill DCA, but that is substantially different from the person doing it every year. Doing it every year is a clear cut case of market timing. The only motivation from withdrawing the funds is because you think there will be an advantage in terms of returns to doing so.

Third, I think when to DCA or when to LS is situational, both depending on the person’s character and the current market conditions, which was the point of my hurricane example. If I were to buy a Lexus, I wouldn’t buy insurance since I trust the brand’s reliability, however I wouldn’t buy a Mercedes without extended warranty. Similarly, in the middle of a global crisis, or in the very late innings of Bull run, I think it makes more sense to DCA than otherwise.
Adonis
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Adonis »

EnjoyIt wrote: Wed Jun 03, 2020 1:10 pm
Adonis wrote: Wed Jun 03, 2020 11:53 am
EnjoyIt wrote: Wed Jun 03, 2020 11:21 am
Adonis wrote: Wed Jun 03, 2020 11:15 am
bertilak wrote: Wed Jun 03, 2020 10:19 am
I've had my say. I'm moving on!
I think I might do the same, it is starting to feel as if people are talking past each other rather than engaging the actual points being made.
OP is 100% accurate in their assessment. Despite that, if you understand the fallacy and willing to accept that expected returns will be lower by DCA so that you have the psychological fortitude to contribute into the market over a short DCA period, I see little harm in that. I would still urge you to re-evaluate your desired AA because it very well may be that your desired AA is to risky for you which is probably why you are choosing to delay getting there via DCA.
Back in August of last year I told you all I wanted to go about 60/40 AA. I told you I was nervous doing LS. People on this board recommended I DCA. In March when the markets dropped 37% I can tell you I was extremely glad I didn’t go all in in August. I can tell you from personal experience that would have been devastating. I was, and continue to be, extremely glad I did choose DCA. Now the markets have recovered quite a bit. I missed the opportunity to buy all in at the 37% drop. I don’t know if we are in a dead cat bounce or not, but if not, I will continue to DCA in until I hit my target 60/40. If there is another major drop, this time I will be ready to pounce on it and won’t have the remainder of my windfall tied up. I was shocked at how fast the market both dropped and recovered. I think it was a historical record on both fronts.
Although I haven’t checked I think if you would have lumped sum in August you would have been in much better shape today. That is if you held onto that investment when the crash came in March. Today it sounds like you are 40/60 or maybe 50/50 on your way to eventually get to 60/40. The fact that you are delaying being at 60/40 today one might say that maybe you are uncomfortable being at 60/40 which is why you are not there yet. I would suggest revisiting your desired asset allocation at this point and see if maybe 40/60 or 50/50 is right for you. Keep it for a year or two. See how it feels and then reevaluate if you should go to 60/40 because you are now more comfortable than you currently are today.

I am going with the assumption that no one can predict what will happen in the market over the next few months, years, or decades. That includes if we will have a rebound in COVID cases considering all those people protesting together, vs maybe a vaccine arriving by the end of the year and we will be business as usual thereafter.

Again, I am not chastising your for your choices because last August it was do nothing vs DCA and DCA is better than doing nothing. Now that we are 10 months later, you have some experience, maybe it is worth revisiting your plan with your new gained knowledge and market experience. Who knows maybe DCA is still psychologically the best decision for you. There is nothing wrong with forgoing expected returns if it allows you to stay the course better. In essence that is what having a bond allocation does for an investor.
Since last August the 60/40 portfolio I had in mind would have returned 2%. I don’t know if that would put me in a much better position today, it would only have made a 34k difference on my 1.7 million. I am completely fine having missed out on those gains. The peace of mind in March was probably worth it alone. Also, I have slowly waded in, I currently have 500k invested over the last 10 months, so there is still a bunch left to go. There is no certainty of a vaccine, we still don’t have an HIV one, and the 1917 influenza pandemic saw the second wave being far worse than the first wave. So I am happy slowly putting the rest in given COVID-19. I still don’t care if that means losing out on gains. My biggest fear back in August was a Japan scenario on a global scale. They didn’t experience a lost decade but a lost generation. They still haven’t recouped from the 1990 drop. It would really suck to see 50% of your money vanish forever and though I don’t think the world will go the way of Japan, I would say given the current state of affairs the odds just increased significantly. My biggest regret was locking away the money not going into the market for short periods of time. I should have kept it all liquid since I missed the buying opportunity of a lifetime when the market was down 37%. Still, as I said back in August, I am happy missing out rather than losing out.
garlandwhizzer
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by garlandwhizzer »

I don't think it's always a black and white issue. As others have pointed out, investing regular amounts per month from paycheck is a fool-proof investment strategy if carried out for decades. Most don't call that dollar cost averaging however and limit the DCA discussion to how one should invest substantial and sudden cash that one wishes to invest. If it's not a substantial amount lump sum is always the way to go. Much of the time, lump sum investing substantial cash is superior in general but but it depends on market and economic circumstances at the point of initiating the strategy. Lump summing a huge amount of money into 100% equity at a point where the market is clearly overvalued and vulnerable to decline (1929, 1999) is not an optimal choice. It can be argued that lump summing into a balanced portfolio of stocks plus bonds at such a time reduces that risk. DCA is an option to consider when you have a large amount of cash you wish to invest in risk assets but have substantial concern about a correction or a bear market within the next 12 months. If a bear market or correction does show up, DCA gives you the option to lump sum what remains of your excess cash into the market when it's on sale. Computer generate backtesting does not take into account the increased returns from this investment opportunity and therefore is not to be fully trusted.

The problem with doing DCA is that you have to really know what you're doing, understand both the status of the market and the economy, and have sufficient experience with observing market cycles. Most investors lack these, but there are some who have a good but not perfect record for picking when to DCA and when to lump sum and also picking the duration time frame for DCA. Warren Buffett for example sometimes uses this approach. DCA in general lowers potential portfolio volatility and may or may not offer better prices to buy into risk markets. Like many investment strategies, it can work well if employed skillfully when the market is in the right conditions. Backtesting DCA versus lump sum favors lump sum but it ignores human emotion and the presence or absence of skill/judgement in the user. Those who employ it well can wind up buying into the market at gradually lower prices and those prices may reach fire sale levels that present an opportunity to lump sum in with the reminder of their cash. DCA would have worked well starting this year for example, offering an opportunity to lump sum most of one's cash into the market at a 30+% discount relative to lump sum which would have bought in at much higher prices. Wading in slowly to risky water is sometimes a better strategy than diving in, although in most market conditions taking the plunge works better in the long run but it increases risk in the short term.

Garland Whizzer
Beehave
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by Beehave »

The OP and others state that if you would DCA a lump sum windfall into your chosen asset allocation, then you'd also, if rational, have to be perfectly willing to take a lump sum out of your perfectly asset-allocated investment and then DCA it back in.

The OP and others supporting that view here are wrong in this, and here's why.

The Boglehead methodology involves ensuring that its practitioner does a self-assessment to determine risk level tolerance in order to set an asset allocation target to help assure ongoing, consistent behavior. Two things to note. First, this behavioral/emotional/circumstances-based self-assessment is a requisite. And second, notably, the methodology does not say, "stocks outperform bonds over time, so go all stocks." Correspondingly, it does not say, "80/20 is better than 60/40." You need to determine what is right for you given your circumstances and your mindset and your dispositions in order to set boundaries on your behavior that can be applied consistently over time to optimize your results within your own holistic circumstances.

Now, after having started down this path and having performed their self-assessment and having set a rational-for-them asset allocation target; suppose that person decides that because of their own nature, or their spouse's nature, or to set an example for their children, or for any other rational reason, that in addition to keeping on working towards their asset allocation, that another self-imposed behavioral rule, just like the self-imposed asset allocation rule, will be beneficial for them. If we think of the setting of an asset allocation boundary as building a fence around behavior, then let's call this additional rule a fence around that fence to further ensure ongoing consistent, long-term behavior needed to achieve a goal of financial security and peace of mind. And that new and added fence around the fence rule (we can call it a meta-rule) says:

Whenever possible, avoid making sudden, large financial transactions.

Now, it may be that this meta-rule is sub-optimal exactly in the same way that over time a 40/60 asset allocation is is sub-optimal compared to to a 60/40 allocation. But exactly in the same way that a 40/60 allocation is not WRONG, this meta-rule is also not wrong, because the rules serve to optimize in a way broader than maximizing absolute theoretical possible outcome, but rather, optimizing within parameters that can be consistently maintained by the boglehead.

Now to finish the proof:

First, given the asset allocation rule and the meta-rule not to make sudden large transactions, applying DCA to a windfall makes perfectly good sense. A person acting under these rules is acting perfectly rationally.

But the OP and others will quickly point out - - that cannot be right because then that would imply that the person, if rational, would also be willing equally to pull the lump sum out and then DCA it back in, which is absurd.

But that is obviously not the case for our hero working under her or his perfectly rational meta-rule and asset allocation schema, for they would absolutely and rationally avoid acting so rashly as to pull a huge amount out of the investment. In fact, they would not lump sum out nor even perform a reverse-DCA out to get to a point back to where the windfall started to repeat the process, because they are at their target asset allocation and that's where their rules tells them to stay. Or putting it another way, according to the rules they set based on their self-assessment, they would DCA in, they would not lump sum out and they would be acting perfectly rationally and consistently because their rules are rational. They would rationally and consistently do exactly what the OP says is irrational and inconsistent.

So the OP (and supporters) are simply wrong. It can be perfectly rational to lump sum the windfall in. It can be perfectly rational to DCA the windfall in. It all depends on the individual and the rules they choose (self-impose) to work under in order to optimize their behavior in the long run to achieve financial security and general peace of mind for them.

The fundamental mistake the OP and others here make is in saying that any things that are equal in monetary value are perfectly identical in every other possible way. Specifically, they confuse equal dollar amounts with being identical, and this is an error. I have a couple sheets of half-cent stamps I purchased as a youth. (Okay - bad investment, but I was not a boglehead yet.) I'm guessing that the sheet of 100 has, in some cosmic sense a value of 50 cents. So two million of those sheets have a value of a million dollars. Given a choice between having 2 million sheets of half-cent stamps delivered to your home (and I'm being kind by not breaking the sheets down into individual stamps) and having ten thousand hundred dollar bills delivered to your home, would you still somehow manage to "irrationally" (according to the OP's fungibility thesis) view these allegedly identical things differently? I would.
tbone555
Posts: 200
Joined: Thu Apr 13, 2017 1:28 pm

Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by tbone555 »

Adonis wrote: Wed Jun 03, 2020 1:39 pm
EnjoyIt wrote: Wed Jun 03, 2020 1:10 pm
Adonis wrote: Wed Jun 03, 2020 11:53 am
EnjoyIt wrote: Wed Jun 03, 2020 11:21 am
Adonis wrote: Wed Jun 03, 2020 11:15 am

I think I might do the same, it is starting to feel as if people are talking past each other rather than engaging the actual points being made.
OP is 100% accurate in their assessment. Despite that, if you understand the fallacy and willing to accept that expected returns will be lower by DCA so that you have the psychological fortitude to contribute into the market over a short DCA period, I see little harm in that. I would still urge you to re-evaluate your desired AA because it very well may be that your desired AA is to risky for you which is probably why you are choosing to delay getting there via DCA.
Back in August of last year I told you all I wanted to go about 60/40 AA. I told you I was nervous doing LS. People on this board recommended I DCA. In March when the markets dropped 37% I can tell you I was extremely glad I didn’t go all in in August. I can tell you from personal experience that would have been devastating. I was, and continue to be, extremely glad I did choose DCA. Now the markets have recovered quite a bit. I missed the opportunity to buy all in at the 37% drop. I don’t know if we are in a dead cat bounce or not, but if not, I will continue to DCA in until I hit my target 60/40. If there is another major drop, this time I will be ready to pounce on it and won’t have the remainder of my windfall tied up. I was shocked at how fast the market both dropped and recovered. I think it was a historical record on both fronts.
Although I haven’t checked I think if you would have lumped sum in August you would have been in much better shape today. That is if you held onto that investment when the crash came in March. Today it sounds like you are 40/60 or maybe 50/50 on your way to eventually get to 60/40. The fact that you are delaying being at 60/40 today one might say that maybe you are uncomfortable being at 60/40 which is why you are not there yet. I would suggest revisiting your desired asset allocation at this point and see if maybe 40/60 or 50/50 is right for you. Keep it for a year or two. See how it feels and then reevaluate if you should go to 60/40 because you are now more comfortable than you currently are today.

I am going with the assumption that no one can predict what will happen in the market over the next few months, years, or decades. That includes if we will have a rebound in COVID cases considering all those people protesting together, vs maybe a vaccine arriving by the end of the year and we will be business as usual thereafter.

Again, I am not chastising your for your choices because last August it was do nothing vs DCA and DCA is better than doing nothing. Now that we are 10 months later, you have some experience, maybe it is worth revisiting your plan with your new gained knowledge and market experience. Who knows maybe DCA is still psychologically the best decision for you. There is nothing wrong with forgoing expected returns if it allows you to stay the course better. In essence that is what having a bond allocation does for an investor.
Since last August the 60/40 portfolio I had in mind would have returned 2%. I don’t know if that would put me in a much better position today, it would only have made a 34k difference on my 1.7 million. I am completely fine having missed out on those gains. The peace of mind in March was probably worth it alone. Also, I have slowly waded in, I currently have 500k invested over the last 10 months, so there is still a bunch left to go. There is no certainty of a vaccine, we still don’t have an HIV one, and the 1917 influenza pandemic saw the second wave being far worse than the first wave. So I am happy slowly putting the rest in given COVID-19. I still don’t care if that means losing out on gains. My biggest fear back in August was a Japan scenario on a global scale. They didn’t experience a lost decade but a lost generation. They still haven’t recouped from the 1990 drop. It would really suck to see 50% of your money vanish forever and though I don’t think the world will go the way of Japan, I would say given the current state of affairs the odds just increased significantly. My biggest regret was locking away the money not going into the market for short periods of time. I should have kept it all liquid since I missed the buying opportunity of a lifetime when the market was down 37%. Still, as I said back in August, I am happy missing out rather than losing out.
So you wished you kept it all liquid by not following your DCA plan so you could have went all in at the bottom?

I think you are making the OP's argument for him. You need to find an AA you can live with and get there ASAP. If that means 30/70 then so be it.
rbaldini
Posts: 1436
Joined: Mon Mar 23, 2015 3:20 pm

Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by rbaldini »

Beehave wrote: Wed Jun 03, 2020 1:48 pm Whenever possible, avoid making sudden, large financial transactions.
Sure. You can construct a rule that can probably render any behavior rational.

There remains the question why a person who just received, say, a windfall of 10% of their total net worth (i.e. not trivial), SHOULD NOT be okay with fully investing that sum now, but SHOULD be ok with having the sum fully invested in six weeks (or whatever). If the answer is market timing, fine - at least we're honest about it. If the answer is "he is weak minded, so he makes strange behavioral rules for himself", again fine. I haven't seen any answers that basically don't boil down to one of these.
tbone555
Posts: 200
Joined: Thu Apr 13, 2017 1:28 pm

Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by tbone555 »

rbaldini wrote: Wed Jun 03, 2020 1:59 pm
Beehave wrote: Wed Jun 03, 2020 1:48 pm Whenever possible, avoid making sudden, large financial transactions.
Sure. You can construct a rule that can probably render any behavior rational.

There remains the question why a person who just received, say, a windfall of 10% of their total net worth (i.e. not trivial), SHOULD NOT be okay with fully investing that sum now, but SHOULD be ok with having the sum fully invested in six weeks (or whatever). If the answer is market timing, fine - at least we're honest about it. If the answer is "he is weak minded, so he makes strange behavioral rules for himself", again fine. I haven't seen any answers that basically don't boil down to one of these.
Good post. If you get a windfall and DCA in an attempt o avoid a bear market, what will you do if the bear market starts soon after you finish DCAing in to the market? Chances are you will sell lower, and maybe even start a new DCA plan!
tbone555
Posts: 200
Joined: Thu Apr 13, 2017 1:28 pm

Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by tbone555 »

So DCA may be a way of fooling oneself that they have a higher risk tolerance than they actually have. This is dangerous as it may increase the risk of panic selling at the time one should be continuing to buy.
Adonis
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by Adonis »

Beehave wrote: Wed Jun 03, 2020 1:48 pm
The fundamental mistake the OP and others here make is in saying that any things that are equal in monetary value are perfectly identical in every other possible way. Specifically, they confuse equal dollar amounts with being identical, and this is an error. I have a couple sheets of half-cent stamps I purchased as a youth. (Okay - bad investment, but I was not a boglehead yet.) I'm guessing that the sheet of 100 has, in some cosmic sense a value of 50 cents. So two million of those sheets have a value of a million dollars. Given a choice between having 2 million sheets of half-cent stamps delivered to your home (and I'm being kind by not breaking the sheets down into individual stamps) and having ten thousand hundred dollar bills delivered to your home, would you still somehow manage to "irrationally" (according to the OP's fungibility thesis) view these allegedly identical things differently? I would.
The whole post was brilliant. Well done.

PS: I only quoted this section to keep it less bulky.
tbone555
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by tbone555 »

Adonis wrote: Wed Jun 03, 2020 2:11 pm
Beehave wrote: Wed Jun 03, 2020 1:48 pm
The fundamental mistake the OP and others here make is in saying that any things that are equal in monetary value are perfectly identical in every other possible way. Specifically, they confuse equal dollar amounts with being identical, and this is an error. I have a couple sheets of half-cent stamps I purchased as a youth. (Okay - bad investment, but I was not a boglehead yet.) I'm guessing that the sheet of 100 has, in some cosmic sense a value of 50 cents. So two million of those sheets have a value of a million dollars. Given a choice between having 2 million sheets of half-cent stamps delivered to your home (and I'm being kind by not breaking the sheets down into individual stamps) and having ten thousand hundred dollar bills delivered to your home, would you still somehow manage to "irrationally" (according to the OP's fungibility thesis) view these allegedly identical things differently? I would.
The whole post was brilliant. Well done.

PS: I only quoted this section to keep it less bulky.
I don't understand the analogy.
sls239
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by sls239 »

Would you ever think, now is the time to take less risk, pull 200k out, and slowly put it back in?
Yes, I would, I have (not 200K though), and I did.

It involved moving and buying a house and going to a single income at a new job.
tbone555
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by tbone555 »

sls239 wrote: Wed Jun 03, 2020 2:14 pm
Would you ever think, now is the time to take less risk, pull 200k out, and slowly put it back in?
Yes, I would, I have (not 200K though), and I did.

It involved moving and buying a house and going to a single income at a new job.
To me that sounds like you AA was too risky based on new life changes. I think the OP is saying all else being equal, would you sell so you can DCA back in,in an attempt to time the market.
Adonis
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Adonis »

tbone555 wrote: Wed Jun 03, 2020 1:58 pm
Adonis wrote: Wed Jun 03, 2020 1:39 pm
EnjoyIt wrote: Wed Jun 03, 2020 1:10 pm
Adonis wrote: Wed Jun 03, 2020 11:53 am
EnjoyIt wrote: Wed Jun 03, 2020 11:21 am

OP is 100% accurate in their assessment. Despite that, if you understand the fallacy and willing to accept that expected returns will be lower by DCA so that you have the psychological fortitude to contribute into the market over a short DCA period, I see little harm in that. I would still urge you to re-evaluate your desired AA because it very well may be that your desired AA is to risky for you which is probably why you are choosing to delay getting there via DCA.
Back in August of last year I told you all I wanted to go about 60/40 AA. I told you I was nervous doing LS. People on this board recommended I DCA. In March when the markets dropped 37% I can tell you I was extremely glad I didn’t go all in in August. I can tell you from personal experience that would have been devastating. I was, and continue to be, extremely glad I did choose DCA. Now the markets have recovered quite a bit. I missed the opportunity to buy all in at the 37% drop. I don’t know if we are in a dead cat bounce or not, but if not, I will continue to DCA in until I hit my target 60/40. If there is another major drop, this time I will be ready to pounce on it and won’t have the remainder of my windfall tied up. I was shocked at how fast the market both dropped and recovered. I think it was a historical record on both fronts.
Although I haven’t checked I think if you would have lumped sum in August you would have been in much better shape today. That is if you held onto that investment when the crash came in March. Today it sounds like you are 40/60 or maybe 50/50 on your way to eventually get to 60/40. The fact that you are delaying being at 60/40 today one might say that maybe you are uncomfortable being at 60/40 which is why you are not there yet. I would suggest revisiting your desired asset allocation at this point and see if maybe 40/60 or 50/50 is right for you. Keep it for a year or two. See how it feels and then reevaluate if you should go to 60/40 because you are now more comfortable than you currently are today.

I am going with the assumption that no one can predict what will happen in the market over the next few months, years, or decades. That includes if we will have a rebound in COVID cases considering all those people protesting together, vs maybe a vaccine arriving by the end of the year and we will be business as usual thereafter.

Again, I am not chastising your for your choices because last August it was do nothing vs DCA and DCA is better than doing nothing. Now that we are 10 months later, you have some experience, maybe it is worth revisiting your plan with your new gained knowledge and market experience. Who knows maybe DCA is still psychologically the best decision for you. There is nothing wrong with forgoing expected returns if it allows you to stay the course better. In essence that is what having a bond allocation does for an investor.
Since last August the 60/40 portfolio I had in mind would have returned 2%. I don’t know if that would put me in a much better position today, it would only have made a 34k difference on my 1.7 million. I am completely fine having missed out on those gains. The peace of mind in March was probably worth it alone. Also, I have slowly waded in, I currently have 500k invested over the last 10 months, so there is still a bunch left to go. There is no certainty of a vaccine, we still don’t have an HIV one, and the 1917 influenza pandemic saw the second wave being far worse than the first wave. So I am happy slowly putting the rest in given COVID-19. I still don’t care if that means losing out on gains. My biggest fear back in August was a Japan scenario on a global scale. They didn’t experience a lost decade but a lost generation. They still haven’t recouped from the 1990 drop. It would really suck to see 50% of your money vanish forever and though I don’t think the world will go the way of Japan, I would say given the current state of affairs the odds just increased significantly. My biggest regret was locking away the money not going into the market for short periods of time. I should have kept it all liquid since I missed the buying opportunity of a lifetime when the market was down 37%. Still, as I said back in August, I am happy missing out rather than losing out.
So you wished you kept it all liquid by not following your DCA plan so you could have went all in at the bottom?

I think you are making the OP's argument for him. You need to find an AA you can live with and get there ASAP. If that means 30/70 then so be it.
I don’t follow. Read Beehave’s post. I couldn’t have expressed things the way he put it, but it strikes me as exactly right. Now, concerning the meta rule, is there anything inconsistent in putting an exception, like this:

Whenever possible, avoid making sudden, large financial transactions (unless it is clearly an opportunity of a life time, like e.g. a 50% market drop).

If DCA is an attempt to avoid feelings of major remorse or regret, I can’t see the problem with buying a major dip. Do I feel bad I couldn’t buy in at the bottom, not really. I wish I could have, but it in the same way as saying I shouldn’t have gotten that speeding ticket. I should have known better than to be impatient on the road last month.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by goodenyou »

I wonder if DCA has been studied to look at how many DCAers stay the course and continue to invest through market drops. That is, the behavioral mistakes that happen by giving an investor an "out" by stopping their periodic contributions.
"Ignorance more frequently begets confidence than does knowledge" | “Do you know how to make a rain dance work? Dance until it rains”
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by tbone555 »

Adonis wrote: Wed Jun 03, 2020 2:22 pm
tbone555 wrote: Wed Jun 03, 2020 1:58 pm
Adonis wrote: Wed Jun 03, 2020 1:39 pm
EnjoyIt wrote: Wed Jun 03, 2020 1:10 pm
Adonis wrote: Wed Jun 03, 2020 11:53 am

Back in August of last year I told you all I wanted to go about 60/40 AA. I told you I was nervous doing LS. People on this board recommended I DCA. In March when the markets dropped 37% I can tell you I was extremely glad I didn’t go all in in August. I can tell you from personal experience that would have been devastating. I was, and continue to be, extremely glad I did choose DCA. Now the markets have recovered quite a bit. I missed the opportunity to buy all in at the 37% drop. I don’t know if we are in a dead cat bounce or not, but if not, I will continue to DCA in until I hit my target 60/40. If there is another major drop, this time I will be ready to pounce on it and won’t have the remainder of my windfall tied up. I was shocked at how fast the market both dropped and recovered. I think it was a historical record on both fronts.
Although I haven’t checked I think if you would have lumped sum in August you would have been in much better shape today. That is if you held onto that investment when the crash came in March. Today it sounds like you are 40/60 or maybe 50/50 on your way to eventually get to 60/40. The fact that you are delaying being at 60/40 today one might say that maybe you are uncomfortable being at 60/40 which is why you are not there yet. I would suggest revisiting your desired asset allocation at this point and see if maybe 40/60 or 50/50 is right for you. Keep it for a year or two. See how it feels and then reevaluate if you should go to 60/40 because you are now more comfortable than you currently are today.

I am going with the assumption that no one can predict what will happen in the market over the next few months, years, or decades. That includes if we will have a rebound in COVID cases considering all those people protesting together, vs maybe a vaccine arriving by the end of the year and we will be business as usual thereafter.

Again, I am not chastising your for your choices because last August it was do nothing vs DCA and DCA is better than doing nothing. Now that we are 10 months later, you have some experience, maybe it is worth revisiting your plan with your new gained knowledge and market experience. Who knows maybe DCA is still psychologically the best decision for you. There is nothing wrong with forgoing expected returns if it allows you to stay the course better. In essence that is what having a bond allocation does for an investor.
Since last August the 60/40 portfolio I had in mind would have returned 2%. I don’t know if that would put me in a much better position today, it would only have made a 34k difference on my 1.7 million. I am completely fine having missed out on those gains. The peace of mind in March was probably worth it alone. Also, I have slowly waded in, I currently have 500k invested over the last 10 months, so there is still a bunch left to go. There is no certainty of a vaccine, we still don’t have an HIV one, and the 1917 influenza pandemic saw the second wave being far worse than the first wave. So I am happy slowly putting the rest in given COVID-19. I still don’t care if that means losing out on gains. My biggest fear back in August was a Japan scenario on a global scale. They didn’t experience a lost decade but a lost generation. They still haven’t recouped from the 1990 drop. It would really suck to see 50% of your money vanish forever and though I don’t think the world will go the way of Japan, I would say given the current state of affairs the odds just increased significantly. My biggest regret was locking away the money not going into the market for short periods of time. I should have kept it all liquid since I missed the buying opportunity of a lifetime when the market was down 37%. Still, as I said back in August, I am happy missing out rather than losing out.
So you wished you kept it all liquid by not following your DCA plan so you could have went all in at the bottom?

I think you are making the OP's argument for him. You need to find an AA you can live with and get there ASAP. If that means 30/70 then so be it.
I don’t follow. Read Beehave’s post. I couldn’t have expressed things the way he put it, but it strikes me as exactly right. Now, concerning the meta rule, is there anything inconsistent in putting an exception, like this:

Whenever possible, avoid making sudden, large financial transactions (unless it is clearly an opportunity of a life time, like e.g. a 50% market drop).

If DCA is an attempt to avoid feelings of major remorse or regret, I can’t see the problem with buying a major dip. Do I feel bad I couldn’t buy in at the bottom, not really. I wish I could have, but it in the same way as saying I shouldn’t have gotten that speeding ticket. I should have known better than to be impatient on the road last month.

I'm not sure I totally follow, but that is Ok. I'm not trying to be combative and I know you are trying to do what's best for yourself and only you can decide what that is.

I do worry though, that you might panic the next time the market has a major correction. Why do you think you will be able to stomach your target AA later if you can't stomach it now?
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by tbone555 »

Or to ask another way...if you don't mind missing out on some gains while you DCA in hopes of avoiding steep losses, why not just choose a lower stock allocation and accept lower expected returns for the longer term.
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by sls239 »

tbone555 wrote: Wed Jun 03, 2020 2:18 pm
sls239 wrote: Wed Jun 03, 2020 2:14 pm
Would you ever think, now is the time to take less risk, pull 200k out, and slowly put it back in?
Yes, I would, I have (not 200K though), and I did.

It involved moving and buying a house and going to a single income at a new job.
To me that sounds like you AA was too risky based on new life changes. I think the OP is saying all else being equal, would you sell so you can DCA back in,in an attempt to time the market.
But the example of a windfall is also a situation that can cause life changes. For example if one's father dies, one may now see a risk of mother needing assistance. A person may literally not know how much money they should see as available to invest. People's lives are often very complicated and to assume that people are just being irrational is probably off the mark.
tbone555
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by tbone555 »

sls239 wrote: Wed Jun 03, 2020 2:31 pm
tbone555 wrote: Wed Jun 03, 2020 2:18 pm
sls239 wrote: Wed Jun 03, 2020 2:14 pm
Would you ever think, now is the time to take less risk, pull 200k out, and slowly put it back in?
Yes, I would, I have (not 200K though), and I did.

It involved moving and buying a house and going to a single income at a new job.
To me that sounds like you AA was too risky based on new life changes. I think the OP is saying all else being equal, . would you sell so you can DCA back in,in an attempt to time the market.
But the example of a windfall is also a situation that can cause life changes. For example if one's father dies, one may now see a risk of mother needing assistance. A person may literally not know how much money they should see as available to invest. People's lives are often very complicated and to assume that people are just being irrational is probably off the mark.
Some good points, but does DCA help with this? A lower allocation to stock might, or perhaps larger emergency fund?
sls239
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by sls239 »

It reduces the risk over a period of time during which they may gain clarity.

In short, DCA is just a way of buying time. Literally.
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adherenceEnergy
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by adherenceEnergy »

Beehave wrote: Wed Jun 03, 2020 1:48 pmThe fundamental mistake the OP and others here make is in saying that any things that are equal in monetary value are perfectly identical in every other possible way. Specifically, they confuse equal dollar amounts with being identical, and this is an error. I have a couple sheets of half-cent stamps I purchased as a youth. (Okay - bad investment, but I was not a boglehead yet.) I'm guessing that the sheet of 100 has, in some cosmic sense a value of 50 cents. So two million of those sheets have a value of a million dollars. Given a choice between having 2 million sheets of half-cent stamps delivered to your home (and I'm being kind by not breaking the sheets down into individual stamps) and having ten thousand hundred dollar bills delivered to your home, would you still somehow manage to "irrationally" (according to the OP's fungibility thesis) view these allegedly identical things differently? I would.
This is the mental accounting bias at play though. Yes, they are technically different items and you can have preferences of one over the other. But if you can click a button and convert between a pile of stamps and a pile of cash at will whenever you like, they effectively should have the same value in terms of decisions you should make with the two piles. It's like asking, which should you prefer to receive, a 10k windfall in your checking account or a 10k windfall in your savings account? They should have basically the same personal value to you, if you can click a button and decide your preferred account. The only difference is one will have an added amount of work of clicking a button, which is negligible. Personally, I'd prefer cash over stamps but I'd be just as happy to receive 100k in stamps as 100k in cash if I can click a button to convert stamps to cash. If you couldn't click a button to sell, I'd be less happy receiving stamps, because I'd have to find a buyer, and whatever amount of work that was would slightly remove it from my enjoyment of receiving 100k in stamps. If I prefer to receive 100k cash so I can invest in the market, but I happened to receive 100k in stamps. Then instead of clicking convert, I decided to hold onto the stamps as an investment, that's illogical, although perhaps emotionally understandable.

This relates to the analogy of should you dca a cash windfall but hold a vtsax windfall. The answer should be the same because all you have to do is click a button to get the windfall in what you would have preferred to receive, but people in this thread specifically said they would treat these two windfalls differently. Given the choice between receiving cash and receiving vtsax, I will take vstax, but if I happened to get cash, I'm just going to immediately convert it to vtsax instead of dca into vtsax. I can have preferences between two items of equal value, and also make a decision to just convert it to the one I want if I get the wrong one. Or if I prefer to dca, and received vtsax, I can just convert it to cash and dca back in, but people said they wouldn't do that. That is the mental accounting bias at play that makes you make illogical decisions.

Now, tying it back to the initial decision to dca or not when you have a pile of cash. You're assigning extra meaning to a specific pile of cash if you want extra insurance on it over the course of 2 months. You're making a different decision with cash than you would in 2 months with something that can instantly be converted to cash. Why is this pile of cash in need of dca insurance when in 2 months it will be invested in assets that you can immediately convert back to cash with a click and give it the same insurance treatment of dca again? The only reason is you're treating the initial cash as different from invested cash that can instantly be converted back to cash. Like investing in stamps because you don't want to click convert, is illogical.

If these arguments convinced you that invested cash and uninvested cash should be thought of as the same because of their convertibility (which admittedly goes against human nature), and only look to optimize your overall portfolio by always trying to keep the right asset allocation for you, you should be emotionally okay with lump summing. After all, the more quickly you get to your desired asset allocation, the better risk/reward there is on your portfolio. If you're still not fully bought in to this idea, you will possibly have regret lump summing and be cursing my name later.
Last edited by adherenceEnergy on Wed Jun 03, 2020 8:24 pm, edited 36 times in total.
Adonis
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by Adonis »

tbone555 wrote: Wed Jun 03, 2020 2:13 pm
Adonis wrote: Wed Jun 03, 2020 2:11 pm
Beehave wrote: Wed Jun 03, 2020 1:48 pm
The fundamental mistake the OP and others here make is in saying that any things that are equal in monetary value are perfectly identical in every other possible way. Specifically, they confuse equal dollar amounts with being identical, and this is an error. I have a couple sheets of half-cent stamps I purchased as a youth. (Okay - bad investment, but I was not a boglehead yet.) I'm guessing that the sheet of 100 has, in some cosmic sense a value of 50 cents. So two million of those sheets have a value of a million dollars. Given a choice between having 2 million sheets of half-cent stamps delivered to your home (and I'm being kind by not breaking the sheets down into individual stamps) and having ten thousand hundred dollar bills delivered to your home, would you still somehow manage to "irrationally" (according to the OP's fungibility thesis) view these allegedly identical things differently? I would.
The whole post was brilliant. Well done.

PS: I only quoted this section to keep it less bulky.
I don't understand the analogy.
It wasn’t my analogy, so you should have asked Beehave, but as far as I take it the analogy could be made with pretty much any object. The stamps were chosen for illustrative purposes. So answer truthfully, would you rather have 1,000,000$ in cash or 1,000,0000$ worth of glass? Interestingly enough, people do have an anchor bias. For example if someone were to win a pen they know is worth 5$, they typically would only part with the pen if they received over 5$ for it. Winning the object takes on special significance and increases the value of the object for that person.
Adonis
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by Adonis »

tbone555 wrote: Wed Jun 03, 2020 2:26 pm
Adonis wrote: Wed Jun 03, 2020 2:22 pm
tbone555 wrote: Wed Jun 03, 2020 1:58 pm
Adonis wrote: Wed Jun 03, 2020 1:39 pm
EnjoyIt wrote: Wed Jun 03, 2020 1:10 pm

Although I haven’t checked I think if you would have lumped sum in August you would have been in much better shape today. That is if you held onto that investment when the crash came in March. Today it sounds like you are 40/60 or maybe 50/50 on your way to eventually get to 60/40. The fact that you are delaying being at 60/40 today one might say that maybe you are uncomfortable being at 60/40 which is why you are not there yet. I would suggest revisiting your desired asset allocation at this point and see if maybe 40/60 or 50/50 is right for you. Keep it for a year or two. See how it feels and then reevaluate if you should go to 60/40 because you are now more comfortable than you currently are today.

I am going with the assumption that no one can predict what will happen in the market over the next few months, years, or decades. That includes if we will have a rebound in COVID cases considering all those people protesting together, vs maybe a vaccine arriving by the end of the year and we will be business as usual thereafter.

Again, I am not chastising your for your choices because last August it was do nothing vs DCA and DCA is better than doing nothing. Now that we are 10 months later, you have some experience, maybe it is worth revisiting your plan with your new gained knowledge and market experience. Who knows maybe DCA is still psychologically the best decision for you. There is nothing wrong with forgoing expected returns if it allows you to stay the course better. In essence that is what having a bond allocation does for an investor.
Since last August the 60/40 portfolio I had in mind would have returned 2%. I don’t know if that would put me in a much better position today, it would only have made a 34k difference on my 1.7 million. I am completely fine having missed out on those gains. The peace of mind in March was probably worth it alone. Also, I have slowly waded in, I currently have 500k invested over the last 10 months, so there is still a bunch left to go. There is no certainty of a vaccine, we still don’t have an HIV one, and the 1917 influenza pandemic saw the second wave being far worse than the first wave. So I am happy slowly putting the rest in given COVID-19. I still don’t care if that means losing out on gains. My biggest fear back in August was a Japan scenario on a global scale. They didn’t experience a lost decade but a lost generation. They still haven’t recouped from the 1990 drop. It would really suck to see 50% of your money vanish forever and though I don’t think the world will go the way of Japan, I would say given the current state of affairs the odds just increased significantly. My biggest regret was locking away the money not going into the market for short periods of time. I should have kept it all liquid since I missed the buying opportunity of a lifetime when the market was down 37%. Still, as I said back in August, I am happy missing out rather than losing out.
So you wished you kept it all liquid by not following your DCA plan so you could have went all in at the bottom?

I think you are making the OP's argument for him. You need to find an AA you can live with and get there ASAP. If that means 30/70 then so be it.
I don’t follow. Read Beehave’s post. I couldn’t have expressed things the way he put it, but it strikes me as exactly right. Now, concerning the meta rule, is there anything inconsistent in putting an exception, like this:

Whenever possible, avoid making sudden, large financial transactions (unless it is clearly an opportunity of a life time, like e.g. a 50% market drop).

If DCA is an attempt to avoid feelings of major remorse or regret, I can’t see the problem with buying a major dip. Do I feel bad I couldn’t buy in at the bottom, not really. I wish I could have, but it in the same way as saying I shouldn’t have gotten that speeding ticket. I should have known better than to be impatient on the road last month.

I'm not sure I totally follow, but that is Ok. I'm not trying to be combative and I know you are trying to do what's best for yourself and only you can decide what that is.

I do worry though, that you might panic the next time the market has a major correction. Why do you think you will be able to stomach your target AA later if you can't stomach it now?
I appreciate being pressed as it forces me to more carefully reflect upon my choices. What I don’t appreciate are insinuations like the poster calling people weak minded. In any case, I think if we are honest, we are all subject to the anchoring effect. If I start with 1,000,000$ and I lose 50% of it, that is extremely different, at least on an emotional level, than starting with 1,000,000$, having it grow to 2,000,000$, and then losing 50%. We are naturally inclined to compare where we are with where we started. Rule #1 of investing is over the long term do not lose money. Rule #2 is remember rule #1.

Now over the long run, say time horizons of 30 years, I know of only a few instances historically speaking where stocks and bonds have not returned positive amounts, after adjusting for inflation. I can think of Japan circa 1990-2020, and cases where entire markets crumbled, like in Russia. So the biggest worry is having a bad sequence of returns the first years. DCA is supposed to help with that. Once you are fully invested and off to the races, well then there isn’t really any looking back. You know the research is crystal clear that buy and hold is the only sensible strategy (excluding withdrawing money for say a medical expense). If it turns out your stomach turns during a major correction, well your IPS should include some proviso about the conditions under which you are allowed to change your AA.
Adonis
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by Adonis »

adherenceEnergy wrote: Wed Jun 03, 2020 2:44 pm
Beehave wrote: Wed Jun 03, 2020 1:48 pmThe fundamental mistake the OP and others here make is in saying that any things that are equal in monetary value are perfectly identical in every other possible way. Specifically, they confuse equal dollar amounts with being identical, and this is an error. I have a couple sheets of half-cent stamps I purchased as a youth. (Okay - bad investment, but I was not a boglehead yet.) I'm guessing that the sheet of 100 has, in some cosmic sense a value of 50 cents. So two million of those sheets have a value of a million dollars. Given a choice between having 2 million sheets of half-cent stamps delivered to your home (and I'm being kind by not breaking the sheets down into individual stamps) and having ten thousand hundred dollar bills delivered to your home, would you still somehow manage to "irrationally" (according to the OP's fungibility thesis) view these allegedly identical things differently? I would.
This is the mental accounting bias at play though. Yes, they are technically different items and you can have preferences of one over the other. But if you can click a button and convert between a pile of stamps and a pile of cash at will whenever you like, they effectively should have the same value in terms of decisions you should make with the two piles. It's like asking, which should you prefer to receive, a 10k windfall in your checking account or a 10k windfall in your savings account? They should have basically the same personal value to you, if you can click a button and decide your preferred account. The only difference is one will have an added amount of work of clicking a button, which is neglible. Personally, I'd prefer cash over stamps but I'd be just as happy to receive 100k in stamps as 100k in cash if I can click a button to convert stamps to cash. If you couldn't click a button to sell, I'd be less happy receiving stamps, because I'd have to find a buyer, and whatever amount of work that was would slightly remove it from my enjoyment of receiving 100k in stamps.

This relates to the analogy of should you dca a cash windfall but hold a vtsax windfall. The answer should be the same because all you have to do is click a button to get the windfall in what you would have preferred to receive, but people in this thread specificly said they would treat these two windfalls differently. That is the mental accounting bias at play that makes you make illogical decisions.
But pulling it out breaks the meta rule of no large transactions, therefore they cannot be analogous. It seems you missed the entire point of the meta rule analysis.
EnjoyIt
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used

Post by EnjoyIt »

Adonis wrote: Wed Jun 03, 2020 1:39 pm
EnjoyIt wrote: Wed Jun 03, 2020 1:10 pm
Adonis wrote: Wed Jun 03, 2020 11:53 am
EnjoyIt wrote: Wed Jun 03, 2020 11:21 am
Adonis wrote: Wed Jun 03, 2020 11:15 am

I think I might do the same, it is starting to feel as if people are talking past each other rather than engaging the actual points being made.
OP is 100% accurate in their assessment. Despite that, if you understand the fallacy and willing to accept that expected returns will be lower by DCA so that you have the psychological fortitude to contribute into the market over a short DCA period, I see little harm in that. I would still urge you to re-evaluate your desired AA because it very well may be that your desired AA is to risky for you which is probably why you are choosing to delay getting there via DCA.
Back in August of last year I told you all I wanted to go about 60/40 AA. I told you I was nervous doing LS. People on this board recommended I DCA. In March when the markets dropped 37% I can tell you I was extremely glad I didn’t go all in in August. I can tell you from personal experience that would have been devastating. I was, and continue to be, extremely glad I did choose DCA. Now the markets have recovered quite a bit. I missed the opportunity to buy all in at the 37% drop. I don’t know if we are in a dead cat bounce or not, but if not, I will continue to DCA in until I hit my target 60/40. If there is another major drop, this time I will be ready to pounce on it and won’t have the remainder of my windfall tied up. I was shocked at how fast the market both dropped and recovered. I think it was a historical record on both fronts.
Although I haven’t checked I think if you would have lumped sum in August you would have been in much better shape today. That is if you held onto that investment when the crash came in March. Today it sounds like you are 40/60 or maybe 50/50 on your way to eventually get to 60/40. The fact that you are delaying being at 60/40 today one might say that maybe you are uncomfortable being at 60/40 which is why you are not there yet. I would suggest revisiting your desired asset allocation at this point and see if maybe 40/60 or 50/50 is right for you. Keep it for a year or two. See how it feels and then reevaluate if you should go to 60/40 because you are now more comfortable than you currently are today.

I am going with the assumption that no one can predict what will happen in the market over the next few months, years, or decades. That includes if we will have a rebound in COVID cases considering all those people protesting together, vs maybe a vaccine arriving by the end of the year and we will be business as usual thereafter.

Again, I am not chastising your for your choices because last August it was do nothing vs DCA and DCA is better than doing nothing. Now that we are 10 months later, you have some experience, maybe it is worth revisiting your plan with your new gained knowledge and market experience. Who knows maybe DCA is still psychologically the best decision for you. There is nothing wrong with forgoing expected returns if it allows you to stay the course better. In essence that is what having a bond allocation does for an investor.
Since last August the 60/40 portfolio I had in mind would have returned 2%. I don’t know if that would put me in a much better position today, it would only have made a 34k difference on my 1.7 million. I am completely fine having missed out on those gains. The peace of mind in March was probably worth it alone. Also, I have slowly waded in, I currently have 500k invested over the last 10 months, so there is still a bunch left to go. There is no certainty of a vaccine, we still don’t have an HIV one, and the 1917 influenza pandemic saw the second wave being far worse than the first wave. So I am happy slowly putting the rest in given COVID-19. I still don’t care if that means losing out on gains. My biggest fear back in August was a Japan scenario on a global scale. They didn’t experience a lost decade but a lost generation. They still haven’t recouped from the 1990 drop. It would really suck to see 50% of your money vanish forever and though I don’t think the world will go the way of Japan, I would say given the current state of affairs the odds just increased significantly. My biggest regret was locking away the money not going into the market for short periods of time. I should have kept it all liquid since I missed the buying opportunity of a lifetime when the market was down 37%. Still, as I said back in August, I am happy missing out rather than losing out.
What you are doing makes sense to you and if it keeps you invested that is a good thing. Fact is you have $500k more in the market today as compared to August which is a good thing. If you did not DCA, you may have had $0 in the market and still worrying about business cycles which I will address further down. BTW, that $34k today that you missed out on will be $100k and more in the future as it would have continued to grow. But again, you are up $10k which is better than the previous alternative of being up $0

From what I gather, you have $500k in a 60/40 portfolio ($300k equities/$200k bonds) with $1.2 million sitting in cash. In essence you really have a portfolio that is $300k equities with $1.4 million in safe assets. That is a 18/72 asset allocation. You have clearly explained that you are very uncomfortable with a 60/40 portfolio today otherwise you would be in it. I question how comfortable you will be with a 60/40 portfolio a year from today. Honestly, I do not think you will be very comfortable at all and I think you should re-evaluate your plan. I would strongly suggest going directly into 40/60 or even 25/75 today and sit with it for 6 months to a year and see how it sits with you. You can then re-evaluate your risk tolerance and adjust accordingly. Based on what you said, I am highly suspicious that you will be comfortable sitting on $1 million in equities several months from today. I am sure you have noticed what I am recommending is not much different than DCA, except it is actually taking your risk tolerance into account. Behavior management is extremely important with regards to personal finance which is why have the right asset allocation is pivotal.

You alluded to business cycles and market volatility. Although my experience investing is only a little over 20 years, during those 20 years I have seen people and experts constantly discuss why the market is at its peak and why the market should go down. Despite that out of those 20 years we have seen only 3 bear markets with maybe almost bear in 2018 and still the market is higher today than it was 20 years ago. I would honestly ignore all the noise about cycles and just keep throwing money into the market. In the history of market timing, I doubt very many if any at all can do it successfully and that includes yourself.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
Topic Author
adherenceEnergy
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by adherenceEnergy »

Adonis wrote: Wed Jun 03, 2020 3:15 pm But pulling it out breaks the meta rule of no large transactions, therefore they cannot be analogous. It seems you missed the entire point of the meta rule analysis.
Creating meta rules to justify illogical behavior is a silly counter argument to the inherent logic of a decision. I feel better when I invest in even share increments on Tuesdays. Therefore, my meta-rule is "only invest in even share increments on Tuesdays." Therefore when I only invest in even share increments on Tuesdays, I'm making a perfectly logical decision because I have a meta rule. It's basically just redefining a known illogical decision as a logical decision. If you want to dca, knowing it's illogical, because it makes you feel better, that's definitely your decision. If that what it takes for you to invest, it can be the right decision for you. But it's not really a counterargument to the logic of why dca makes no logical sense.
sandramjet
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Re: Why Dollar Cost Averaging (DCA) is a mental accounting bias and should never be used [vs. lump sum]

Post by sandramjet »

The really illogical thing I do is waste my time reading all these posts, when it is clear that no one is going to change anyone else's mind....
I will do what I choose to do, and not feel guilty if someone else (rightly or wrongly) thinks I am doing the wrong thing.
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