lump sum investing vs dollar cost averaging in the present market

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lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 9:36 am

I have sold a house and have a sum to invest (which is more than 15% of my liquid worth). I know that statistically you're better off with a lump sum investment, however the market is a lot more volatile these days than usual, so I am considering DCA (though I know it sounds a bit like market timing). What are your thoughts on this, and over how long a time frame do you think it is reasonable to DCA?
Alternatively, what do you think of putting limit orders, so that when (or if...) there are drops in prices, I can buy the Etfs cheaper?
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Re: lump sum investing vs dollar cost averaging in the present market

Post by sls239 » Sat Jun 27, 2020 9:43 am

Do you see yourself under just about any circumstances needing this money in the next 5-10 years?

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Re: lump sum investing vs dollar cost averaging in the present market

Post by 02nz » Sat Jun 27, 2020 9:46 am

If you do DCA, set a plan and stick to it. Write it down and do it according to that plan (just as an example: invest $10K on the 15th of every month) no matter whether the market is up, down or flat.

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Re: lump sum investing vs dollar cost averaging in the present market

Post by dwickenh » Sat Jun 27, 2020 9:48 am

The whole idea of DCA is not to time the market, but to make regular investments based on a planned investment timeline. There is nothing wrong with a plan to split the amount into 12 equal investments to be made on the 1st of each month. If you want to wait until you think the market price is lowest, that would be market timing, It is really just a mental game to make sure you have no major regrets.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 9:51 am

sls239 wrote:
Sat Jun 27, 2020 9:43 am
Do you see yourself under just about any circumstances needing this money in the next 5-10 years?
no this is for my children or for me say 30 years from now. The point is I saw an article showing that LSI usually outperforms, but when it doesn't, it can underperform a lot compared to DCA. I try to copy the link below.
https://ofdollarsanddata.com/wp-content ... tocks.jpeg

So with DCA you risk less if things go really wrong.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 9:55 am

dwickenh wrote:
Sat Jun 27, 2020 9:48 am
It is really just a mental game to make sure you have no major regrets.
do you refer to DCA in that sentence?
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Re: lump sum investing vs dollar cost averaging in the present market

Post by BeBH65 » Sat Jun 27, 2020 10:05 am

Lauretta wrote:
Sat Jun 27, 2020 9:51 am
no this is for my children or for me say 30 years from now. The point is I saw an article showing that LSI usually outperforms, but when it doesn't, it can underperform a lot compared to DCA. I try to copy the link below.
https://ofdollarsanddata.com/wp-content ... tocks.jpeg

So with DCA you risk less if things go really wrong.
Ben Felix spoke about DCA Vs lump-sum in his recent podcast. He analysed in detail about the cases where lumpsum was worse. https://rationalreminder.ca/podcast/101
Last edited by BeBH65 on Sat Jun 27, 2020 10:09 am, edited 1 time in total.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by sls239 » Sat Jun 27, 2020 10:07 am

Lauretta wrote:
Sat Jun 27, 2020 9:51 am
sls239 wrote:
Sat Jun 27, 2020 9:43 am
Do you see yourself under just about any circumstances needing this money in the next 5-10 years?
no this is for my children or for me say 30 years from now. The point is I saw an article showing that LSI usually outperforms, but when it doesn't, it can underperform a lot compared to DCA. I try to copy the link below.
https://ofdollarsanddata.com/wp-content ... tocks.jpeg

So with DCA you risk less if things go really wrong.
That chart is performance over 24 months. You are investing for 30 years.

Do you know what that same chart would look like it were for 30 years and not 24 months?

https://actuaryonfire.com/lump-sum-doll ... ing-part2/

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Re: lump sum investing vs dollar cost averaging in the present market

Post by livesoft » Sat Jun 27, 2020 10:12 am

Lauretta wrote:
Sat Jun 27, 2020 9:36 am
What are your thoughts on this, and over how long a time frame do you think it is reasonable to DCA?
Alternatively, what do you think of putting limit orders, so that when (or if...) there are drops in prices, I can buy the Etfs cheaper?
You do you, so I don't have any problems with DCA. I would invest 50% of total now and 5% of total each following month unless there was an RBD whereupon I would invest another 5% that day. So one would be fully invested in 10 months if there were no RBDs and in 7 months with there were 3 RBDs.

I would not put in limit orders, but instead would suggest you have your brokerage send you a price alert by e-mail or text when one of your proposed prices are reached. That way, you can use your brain to decide whether to place buy order or not.

The above method should have less than a 1% to 2% performance difference a year from now versus just doing Lump-Sum now. If you think about it, one could have a 1% to 2% performance difference just based on the day one did a lump sum in the volatile markets that we have now. That is, all the arguments are just noise right now including any presented in this post that you are reading right now.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 10:26 am

livesoft wrote:
Sat Jun 27, 2020 10:12 am
Lauretta wrote:
Sat Jun 27, 2020 9:36 am
What are your thoughts on this, and over how long a time frame do you think it is reasonable to DCA?
Alternatively, what do you think of putting limit orders, so that when (or if...) there are drops in prices, I can buy the Etfs cheaper?
You do you, so I don't have any problems with DCA. I would invest 50% of total now and 5% of total each following month unless there was an RBD whereupon I would invest another 5% that day. So one would be fully invested in 10 months if there were no RBDs and in 7 months with there were 3 RBDs.

I would not put in limit orders, but instead would suggest you have your brokerage send you a price alert by e-mail or text when one of your proposed prices are reached. That way, you can use your brain to decide whether to place buy order or not.

The above method should have less than a 1% to 2% performance difference a year from now versus just doing Lump-Sum now. If you think about it, one could have a 1% to 2% performance difference just based on the day one did a lump sum in the volatile markets that we have now. That is, all the arguments are just noise right now including any presented in this post that you are reading right now.
this sounds quite cool: having 50% invested immediately seems like a bit of a compromise between the 2 methods. This would mean less risk than LSI in case things went haywire in the coming months; and on the other hand I wouldn't lose that much if the markets went up. How do you estimate
The above method should have less than a 1% to 2% performance difference a year from now versus just doing Lump-Sum now.
?
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Re: lump sum investing vs dollar cost averaging in the present market

Post by dwickenh » Sat Jun 27, 2020 10:32 am

Lauretta wrote:
Sat Jun 27, 2020 9:55 am
dwickenh wrote:
Sat Jun 27, 2020 9:48 am
It is really just a mental game to make sure you have no major regrets.
do you refer to DCA in that sentence?
Yes, when dealing with a lump sum, DCA is used to minimize regrets of investing just before the market falls.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 11:07 am

BeBH65 wrote:
Sat Jun 27, 2020 10:05 am
Lauretta wrote:
Sat Jun 27, 2020 9:51 am
no this is for my children or for me say 30 years from now. The point is I saw an article showing that LSI usually outperforms, but when it doesn't, it can underperform a lot compared to DCA. I try to copy the link below.
https://ofdollarsanddata.com/wp-content ... tocks.jpeg

So with DCA you risk less if things go really wrong.
Ben Felix spoke about DCA Vs lump-sum in his recent podcast. He analysed in detail about the cases where lumpsum was worse. https://rationalreminder.ca/podcast/101
Thank you it looks interesting, I am going to listen to it tonight
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Re: lump sum investing vs dollar cost averaging in the present market

Post by TimeTheMarket » Sat Jun 27, 2020 11:23 am

Lauretta wrote:
Sat Jun 27, 2020 9:36 am
I have sold a house and have a sum to invest (which is more than 15% of my liquid worth). I know that statistically you're better off with a lump sum investment, however the market is a lot more volatile these days than usual, so I am considering DCA (though I know it sounds a bit like market timing). What are your thoughts on this, and over how long a time frame do you think it is reasonable to DCA?
Alternatively, what do you think of putting limit orders, so that when (or if...) there are drops in prices, I can buy the Etfs cheaper?
It sounds like market timing because it is.

As you said statistically it is inferior.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 12:02 pm

TimeTheMarket wrote:
Sat Jun 27, 2020 11:23 am

As you said statistically it is inferior.
yes but you are not a statistic, you only live once. Suppose in this particular situation you have a huge drop in the market after LSI, the damage will be much greater than if you DCA. So I'm trying to figure out the pros and cons. I mean generally DCA seems inferior, but I guess there's less chance of being badly damaged.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Robot Monster » Sat Jun 27, 2020 12:07 pm

TimeTheMarket wrote:
Sat Jun 27, 2020 11:23 am
Lauretta wrote:
Sat Jun 27, 2020 9:36 am
I have sold a house and have a sum to invest (which is more than 15% of my liquid worth). I know that statistically you're better off with a lump sum investment, however the market is a lot more volatile these days than usual, so I am considering DCA (though I know it sounds a bit like market timing). What are your thoughts on this, and over how long a time frame do you think it is reasonable to DCA?
Alternatively, what do you think of putting limit orders, so that when (or if...) there are drops in prices, I can buy the Etfs cheaper?
It sounds like market timing because it is.

As you said statistically it is inferior.
What if you have a DCA schedule, but have a limit order that lump sums it all in if the market drops by, let's say, 20%? Is that worse than just DCAing?
We are in a permanent and anxious "just don't know" situation, where the stock market is inherently risky because of unstable investor psychology.

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Re: lump sum investing vs dollar cost averaging in the present market

Post by livesoft » Sat Jun 27, 2020 12:12 pm

Lauretta wrote:
Sat Jun 27, 2020 10:26 am
this sounds quite cool: having 50% invested immediately seems like a bit of a compromise between the 2 methods. This would mean less risk than LSI in case things went haywire in the coming months; and on the other hand I wouldn't lose that much if the markets went up. How do you estimate
The above method should have less than a 1% to 2% performance difference a year from now versus just doing Lump-Sum now.
?
The numbers come from dividing the "benefit" of LS vs DCA by 2. Do you understand why that is the case?
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Re: lump sum investing vs dollar cost averaging in the present market

Post by bertilak » Sat Jun 27, 2020 12:32 pm

Lauretta wrote:
Sat Jun 27, 2020 12:02 pm
TimeTheMarket wrote:
Sat Jun 27, 2020 11:23 am

As you said statistically it is inferior.
yes but you are not a statistic, you only live once. Suppose in this particular situation you have a huge drop in the market after LSI, the damage will be much greater than if you DCA. So I'm trying to figure out the pros and cons. I mean generally DCA seems inferior, but I guess there's less chance of being badly damaged.
Unless that "huge drop" comes after the DCA period, perhaps even immediately after.

Once the DCA period is over, you are exposed to all the same risk as at the beginning. If it was too big a risk at the beginning, it is still too big a risk (call it potential regret). This is why the advice is to, instead of DCA's temporary reprieve, establish an AA with acceptable risk and then take the superior course and invest it all at once at that acceptable AA. The superior course is defined as NOT believing you can successfully cherry-pick the best time to invest. If you truly believe you can cherry-pick the best time, DCA is a rather inefficient way to do so.
Last edited by bertilak on Sat Jun 27, 2020 12:37 pm, edited 1 time in total.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 12:36 pm

livesoft wrote:
Sat Jun 27, 2020 12:12 pm
The above method should have less than a 1% to 2% performance difference a year from now versus just doing Lump-Sum now.
?
The numbers come from dividing the "benefit" of LS vs DCA by 2. Do you understand why that is the case?
[/quote]

I guess that it's because half of the money is LSI, so since you only do DCA with 50% of it, the expected underperformance is divided by 2. ( :?: )
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 12:42 pm

bertilak wrote:
Sat Jun 27, 2020 12:32 pm


Unless that "huge drop" comes after the DCA period, perhaps even immediately after.

Once the DCA period is over, you are exposed to all the same risk as at the beginning.
That's a really good point actually, I adn't thought of that :oops: I mean if the market is unpredictable then the chance that the huge drop comes just after the one LSI is the same as that it come after the DCA is over... So it doesn't look any safer. :o
Probably then DCA might have some interest if the market goes sideways and has huge volatility: in this case I guess you can argue that you minimise the chance of buying at a peak in the volatile market and you average over peaks and troughs.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by bertilak » Sat Jun 27, 2020 12:46 pm

Lauretta wrote:
Sat Jun 27, 2020 12:42 pm
bertilak wrote:
Sat Jun 27, 2020 12:32 pm


Unless that "huge drop" comes after the DCA period, perhaps even immediately after.

Once the DCA period is over, you are exposed to all the same risk as at the beginning.
That's a really good point actually, I adn't thought of that :oops: I mean if the market is unpredictable then the chance that the huge drop comes just after the one LSI is the same as that it come after the DCA is over... So it doesn't look any safer. :o
Probably then DCA might have some interest if the market goes sideways and has huge volatility: in this case I guess you can argue that you minimise the chance of buying at a peak in the volatile market and you average over peaks and troughs.
You are now getting into the belief that many small bets are safer than one big bet. The people that run the casinos will encourage that belief. The belief that it is safer encourages betting in the same way that pro-DCA people hope DCA will encourage investing.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 12:57 pm

bertilak wrote:
Sat Jun 27, 2020 12:46 pm
Lauretta wrote:
Sat Jun 27, 2020 12:42 pm
bertilak wrote:
Sat Jun 27, 2020 12:32 pm


Unless that "huge drop" comes after the DCA period, perhaps even immediately after.

Once the DCA period is over, you are exposed to all the same risk as at the beginning.
That's a really good point actually, I adn't thought of that :oops: I mean if the market is unpredictable then the chance that the huge drop comes just after the one LSI is the same as that it come after the DCA is over... So it doesn't look any safer. :o
Probably then DCA might have some interest if the market goes sideways and has huge volatility: in this case I guess you can argue that you minimise the chance of buying at a peak in the volatile market and you average over peaks and troughs.
You are now getting into the belief that many small bets are safer than one big bet. The people that run the casinos will encourage that belief. The belief that it is safer encourages betting in the same way that pro-DCA people hope DCA will encourage investing.
Well if the market went sideways and you imagine prices oscillating around a base value, with a lot of volatility, then if you make many small bets you will purchase your ETF at that average price (the base value around which prices oscillate). If you make one big bet, you might be unlucky and buy at a peak, or lucky and buy at a trough.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by magicrat » Sat Jun 27, 2020 1:03 pm

If you are going to DCA with this money, why wouldn’t you DCA with the rest of your investments (I.e., sell them all now, and DCA back in)?

Taxes aside of course

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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 1:13 pm

magicrat wrote:
Sat Jun 27, 2020 1:03 pm
If you are going to DCA with this money, why wouldn’t you DCA with the rest of your investments (I.e., sell them all now, and DCA back in)?

Taxes aside of course
...and bid ask spreads (I have Etfs). But I see your point. Guess it's a psychological thing as well. Though I am pretty sure that in a volatile market it's safer to ease in gradually.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by bertilak » Sat Jun 27, 2020 1:14 pm

Lauretta wrote:
Sat Jun 27, 2020 12:57 pm
bertilak wrote:
Sat Jun 27, 2020 12:46 pm
Lauretta wrote:
Sat Jun 27, 2020 12:42 pm
bertilak wrote:
Sat Jun 27, 2020 12:32 pm


Unless that "huge drop" comes after the DCA period, perhaps even immediately after.

Once the DCA period is over, you are exposed to all the same risk as at the beginning.
That's a really good point actually, I adn't thought of that :oops: I mean if the market is unpredictable then the chance that the huge drop comes just after the one LSI is the same as that it come after the DCA is over... So it doesn't look any safer. :o
Probably then DCA might have some interest if the market goes sideways and has huge volatility: in this case I guess you can argue that you minimise the chance of buying at a peak in the volatile market and you average over peaks and troughs.
You are now getting into the belief that many small bets are safer than one big bet. The people that run the casinos will encourage that belief. The belief that it is safer encourages betting in the same way that pro-DCA people hope DCA will encourage investing.
Well if the market went sideways and you imagine prices oscillating around a base value, with a lot of volatility, then if you make many small bets you will purchase your ETF at that average price (the base value around which prices oscillate). If you make one big bet, you might be unlucky and buy at a peak, or lucky and buy at a trough.
I will assume you are investing because you expect a generally increasing market, unless you are market timing. DCA puts off purchase to the future where you expect prices will be higher -- even if only slightly higher in the near future. If you don't expect that you should probably not invest at all. If you are making market predictions (sideways, volatile) you should try to capitalize on that, for example buy only on down days. DCA is an inefficient way to take advantage.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by TheoLeo » Sat Jun 27, 2020 1:28 pm

Maybe you plan to invest into an asset allocation you are no longer comfortable with? Otherwise you shouldn´t have a problem with LSI.

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Re: lump sum investing vs dollar cost averaging in the present market

Post by livesoft » Sat Jun 27, 2020 1:31 pm

As far as I am aware, none of the "studies" about LS vs DCA ever show would the results would be of LS versus LS-later-when-market-is-down-2%. LOL!

Let's face it: Anytime one can buy lower than when they did their initial LS, then it's better. It is pretty darn rare for the market to never go lower than one's initial LS date, but it is possible. However, I suspect many people could not LS on a day that was 1% or 2% lower than their initial LS date. :twisted:
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Re: lump sum investing vs dollar cost averaging in the present market

Post by whereskyle » Sat Jun 27, 2020 1:56 pm

Lauretta wrote:
Sat Jun 27, 2020 12:42 pm
bertilak wrote:
Sat Jun 27, 2020 12:32 pm


Unless that "huge drop" comes after the DCA period, perhaps even immediately after.

Once the DCA period is over, you are exposed to all the same risk as at the beginning.
That's a really good point actually, I adn't thought of that :oops: I mean if the market is unpredictable then the chance that the huge drop comes just after the one LSI is the same as that it come after the DCA is over... So it doesn't look any safer. :o
Probably then DCA might have some interest if the market goes sideways and has huge volatility: in this case I guess you can argue that you minimise the chance of buying at a peak in the volatile market and you average over peaks and troughs.
I think the most reasonable solution is to lump sum and then invest more money as you earn it going forward. That is systematic investing that reduces risk over time. DCAing is really just maintaining a large cash position for an arbitrary amount of time. You know that statistically you are likely to do worse if you dca, and Bertilak's point demonstrates that you are just as likely to endure a year or more of stress and uncertainty dcaing, wondering whether you made the right decision, sometimes thinking yes, sometimes thinking no, only at the end of that process to have the same chance of experiencing a huge crash as you did at the beginning. The superiority of lump sum investing for the long haul is the fact that you end the uncertainty and you take yourself out of the equation. If you choose the right portfolio, timing is immaterial, so long as you stay in the market over time. The market's return evens out over time. If there is a crash, the market is likely to go up. Keep buying with money you have then. If your time horizon is longer than twenty years, there is no historical evidence suggesting that you will have good cause to regret lumpsumming, even if there is a crash immediately after you do it. Embrace that possibility and choose a superior portfolio that can recover from it over your time horizon.

Trust in the superiority of your asset allocation, which is all you can control. You cannot control what happens in the market once you invest. DCAing doesn't change that. Don't use DCAing in an attempt to cover up the fact that there is risk in investing. You should confront that risk head on and decide on a portfolio that reflects your risk tolerance. DCAing is not a reliable risk reduction technique. Portfolio construction is.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by marcopolo » Sat Jun 27, 2020 2:01 pm

sls239 wrote:
Sat Jun 27, 2020 10:07 am
Lauretta wrote:
Sat Jun 27, 2020 9:51 am
sls239 wrote:
Sat Jun 27, 2020 9:43 am
Do you see yourself under just about any circumstances needing this money in the next 5-10 years?
no this is for my children or for me say 30 years from now. The point is I saw an article showing that LSI usually outperforms, but when it doesn't, it can underperform a lot compared to DCA. I try to copy the link below.
https://ofdollarsanddata.com/wp-content ... tocks.jpeg

So with DCA you risk less if things go really wrong.
That chart is performance over 24 months. You are investing for 30 years.

Do you know what that same chart would look like it were for 30 years and not 24 months?

https://actuaryonfire.com/lump-sum-doll ... ing-part2/

I don't think that analysis would apply to the OP situation.
I think that paper is addressing continuous DCA.

But, if you have a fixed amount today, and DCA it over the next 12 months, and you just happen to get lucky and DCA beats Lump sum over that 12 month timeframe. (I am not advocating this just considering the situation where you did happen to time it right and DCA won over the DCA time period). Then going forward, you follow the same investing plan (no additional DCA bets you are likely to loose) it does not make any difference what happens in the next 30 years, DCA will still come out ahead.

So, if you are sure (how could you be?), that DCA is a good bet in the short term, I am not sure how investment horizon cones into play at all?
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 2:20 pm

whereskyle wrote:
Sat Jun 27, 2020 1:56 pm

I think the most reasonable solution is to lump sum and then invest more money as you earn it going forward.
I'am either leaving my job or taking a sabbatical from September, so I won't be earning and investing more money (at least for a while). I will be living from rents of my rental properties. That's another reason why I thought perhaps DCA.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by 7eight9 » Sat Jun 27, 2020 2:50 pm

Japanese investors who lump summed in December 1989 are still regretting their decision.

The jury is still out on how US investors who lump sum in June of 2020 will feel in a few decades.
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Lauretta
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 2:53 pm

marcopolo wrote:
Sat Jun 27, 2020 2:01 pm

So, if you are sure (how could you be?), that DCA is a good bet in the short term, I am not sure how investment horizon cones into play at all?
exactly. If at the end of DCA you come up on top relative to LSI, then no matter what the horizon you' ll always be on top (and viceversa)
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whereskyle
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Re: lump sum investing vs dollar cost averaging in the present market

Post by whereskyle » Sat Jun 27, 2020 2:56 pm

Lauretta wrote:
Sat Jun 27, 2020 2:20 pm
whereskyle wrote:
Sat Jun 27, 2020 1:56 pm

I think the most reasonable solution is to lump sum and then invest more money as you earn it going forward.
I'am either leaving my job or taking a sabbatical from September, so I won't be earning and investing more money (at least for a while). I will be living from rents of my rental properties. That's another reason why I thought perhaps DCA.
If the investment is for 30 years, you should expect the same return at the end, regardless of what happens the day after you invest. If the market doesn't crash the day after you invest, it will multiple times over that 30 years, and you will almost certainly have the same result regardless of how you choose to enter the market. Focus on whether your asset allocation appropriately reflects your risk tolerance. For me, I am 100% equities, and I expect about an 8% annual return (nominal), but I don't expect that return to "average out" until 30 years from now. Until then, I may show a much higher return in some years and a much lower one in others. but over 30 years the band of outcomes shrinks to a very narrow margin. Unless you are planning to sell if you see a higher return more quickly, you are wasting your energy worrying about when to enter the market.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle

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Re: lump sum investing vs dollar cost averaging in the present market

Post by whereskyle » Sat Jun 27, 2020 2:59 pm

7eight9 wrote:
Sat Jun 27, 2020 2:50 pm
Japanese investors who lump summed in December 1989 are still regretting their decision.

The jury is still out on how US investors who lump sum in June of 2020 will feel in a few decades.
It's unhelpful in my opinion to reference the bubble resulting in the highest CAPE in modern history as an analog to OP's current situation. Whatever's happening in the market today, price to earnings ratios almost certainly cannot contract to the same extent.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle

Robot Monster
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Robot Monster » Sat Jun 27, 2020 3:08 pm

whereskyle wrote:
Sat Jun 27, 2020 2:59 pm
7eight9 wrote:
Sat Jun 27, 2020 2:50 pm
Japanese investors who lump summed in December 1989 are still regretting their decision.

The jury is still out on how US investors who lump sum in June of 2020 will feel in a few decades.
It's unhelpful in my opinion to reference the bubble resulting in the highest CAPE in modern history as an analog to OP's current situation. Whatever's happening in the market today, price to earnings ratios almost certainly cannot contract to the same extent.
For reference, Japan's historical CAPE.

Image

Appears CAPE was about 90 in 1989 Japan. Quite high compared to the current U.S. CAPE.
We are in a permanent and anxious "just don't know" situation, where the stock market is inherently risky because of unstable investor psychology.

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Re: lump sum investing vs dollar cost averaging in the present market

Post by 7eight9 » Sat Jun 27, 2020 3:11 pm

whereskyle wrote:
Sat Jun 27, 2020 2:59 pm
7eight9 wrote:
Sat Jun 27, 2020 2:50 pm
Japanese investors who lump summed in December 1989 are still regretting their decision.

The jury is still out on how US investors who lump sum in June of 2020 will feel in a few decades.
It's unhelpful in my opinion to reference the bubble resulting in the highest CAPE in modern history as an analog to OP's current situation. Whatever's happening in the market today, price to earnings ratios almost certainly cannot contract to the same extent.
We can agee to disagree. I think it is helpful to remind investors that stocks may not recover for decades. US investors have been relatively spoiled by the recoveries of late. There is no guarantee that such recoveries will occur in the future.
I guess it all could be much worse. | They could be warming up my hearse.

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Re: lump sum investing vs dollar cost averaging in the present market

Post by Robot Monster » Sat Jun 27, 2020 3:31 pm

7eight9 wrote:
Sat Jun 27, 2020 3:11 pm
whereskyle wrote:
Sat Jun 27, 2020 2:59 pm
7eight9 wrote:
Sat Jun 27, 2020 2:50 pm
Japanese investors who lump summed in December 1989 are still regretting their decision.

The jury is still out on how US investors who lump sum in June of 2020 will feel in a few decades.
It's unhelpful in my opinion to reference the bubble resulting in the highest CAPE in modern history as an analog to OP's current situation. Whatever's happening in the market today, price to earnings ratios almost certainly cannot contract to the same extent.
We can agee to disagree. I think it is helpful to remind investors that stocks may not recover for decades. US investors have been relatively spoiled by the recoveries of late. There is no guarantee that such recoveries will occur in the future.
You can see how investing in 1928 (the year before the great crash of 1929) worked out by looking at the graphic on this page,
http://archive.nytimes.com/www.nytimes. ... aphic.html

Worked out not at all badly if you withdrew after 30 years. (This being the number of years OP is approximately investing for).

Not so horrifying investing for 30 years starting in, let's say, 1960.
Last edited by Robot Monster on Sat Jun 27, 2020 3:36 pm, edited 1 time in total.
We are in a permanent and anxious "just don't know" situation, where the stock market is inherently risky because of unstable investor psychology.

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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 3:33 pm

7eight9 wrote:
Sat Jun 27, 2020 3:11 pm
whereskyle wrote:
Sat Jun 27, 2020 2:59 pm
7eight9 wrote:
Sat Jun 27, 2020 2:50 pm
Japanese investors who lump summed in December 1989 are still regretting their decision.

The jury is still out on how US investors who lump sum in June of 2020 will feel in a few decades.
It's unhelpful in my opinion to reference the bubble resulting in the highest CAPE in modern history as an analog to OP's current situation. Whatever's happening in the market today, price to earnings ratios almost certainly cannot contract to the same extent.
We can agee to disagree. I think it is helpful to remind investors that stocks may not recover for decades. US investors have been relatively spoiled by the recoveries of late. There is no guarantee that such recoveries will occur in the future.
I see your point but I am not sure that DCA is very helpful, since if a Japanes investor had DCA say over the 12 months from Jan to Dec 1989, she would have been hit by the downturn just after finishing investing, and so the damage would have been huge too (even though not as huge as for LSI in December)
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Re: lump sum investing vs dollar cost averaging in the present market

Post by bertilak » Sat Jun 27, 2020 3:35 pm

7eight9 wrote:
Sat Jun 27, 2020 2:50 pm
Japanese investors who lump summed in December 1989 are still regretting their decision.
And how much better off would they be if they spread that out over a year?
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

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Re: lump sum investing vs dollar cost averaging in the present market

Post by Robot Monster » Sat Jun 27, 2020 3:58 pm

bertilak wrote:
Sat Jun 27, 2020 3:35 pm
7eight9 wrote:
Sat Jun 27, 2020 2:50 pm
Japanese investors who lump summed in December 1989 are still regretting their decision.
And how much better off would they be if they spread that out over a year?
Let's compute this. Not doing a year, but here's six months...

Date invested - date withdrew --> Total Nikkei Return (Div Reinvested)
Dec 1989 - Dec 2019 --> -8.210%
Jan 1990 - Dec 2019 --> -6.539%
Feb 1990 - Dec 2019 --> -4.274%
March 1990 - Dec 2019 --> 8.165%
April 1990 - Dec 2019 --> 19.437%
May 1990 - Dec 2019 --> 9.697%

Feel free to check my work or calculate on your own,
https://dqydj.com/nikkei-return-calcula ... nvestment/
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Re: lump sum investing vs dollar cost averaging in the present market

Post by Steve Reading » Sat Jun 27, 2020 4:27 pm

Oh shoot did the comments already start?

*Grabs popcorn and sits down*

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Re: lump sum investing vs dollar cost averaging in the present market

Post by jacoavlu » Sat Jun 27, 2020 4:33 pm

sls239 wrote:
Sat Jun 27, 2020 10:07 am
Lauretta wrote:
Sat Jun 27, 2020 9:51 am
sls239 wrote:
Sat Jun 27, 2020 9:43 am
Do you see yourself under just about any circumstances needing this money in the next 5-10 years?
no this is for my children or for me say 30 years from now. The point is I saw an article showing that LSI usually outperforms, but when it doesn't, it can underperform a lot compared to DCA. I try to copy the link below.
https://ofdollarsanddata.com/wp-content ... tocks.jpeg

So with DCA you risk less if things go really wrong.
That chart is performance over 24 months. You are investing for 30 years.

Do you know what that same chart would look like it were for 30 years and not 24 months?

https://actuaryonfire.com/lump-sum-doll ... ing-part2/
that actuary on fire blog post is worthless. Do you know what data he is actually comparing? Hint: how long is the DCA period compared to lump sum? Is that a realistic scenario?

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Re: lump sum investing vs dollar cost averaging in the present market

Post by YRT70 » Sat Jun 27, 2020 7:50 pm

Lauretta wrote:
Sat Jun 27, 2020 9:36 am
I have sold a house and have a sum to invest (which is more than 15% of my liquid worth). I know that statistically you're better off with a lump sum investment, however the market is a lot more volatile these days than usual, so I am considering DCA (though I know it sounds a bit like market timing). What are your thoughts on this, and over how long a time frame do you think it is reasonable to DCA?
Alternatively, what do you think of putting limit orders, so that when (or if...) there are drops in prices, I can buy the Etfs cheaper?
If you can handle the risk I'd go with lump sum. If not, DCA is the next best alternative.

Here's a good read that explains the benefits of both: https://www.kitces.com/blog/dollar-cost ... s-returns/

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Re: lump sum investing vs dollar cost averaging in the present market

Post by VaR » Sat Jun 27, 2020 8:00 pm

A lot of the analysis that has been done is for long-baseline DCA (say, six months to a year), where the foregone expected return is significant. I'll let those analyses speak for themselves.

I tend to go with the lump sum strategy myself, though in the current market environment, I tend to be somewhat irrational and DCA on a weekly basis over the course of a month - so 1/3 of the total every Tuesday for the next three weeks. I don't know if this has any upside or downside, but it makes me feel better to avoid one-day regret.

On a related note, has anyone seen an analysis on whether there is short-term reversion-to-mean in the equity markets in 2020?

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Re: lump sum investing vs dollar cost averaging in the present market

Post by JustinR » Sat Jun 27, 2020 8:29 pm

Love these threads.

"I understand that DCA doesn't make any sense and is mathematically worse than lump sum investing. Should I do it anyway?"

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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sat Jun 27, 2020 11:55 pm

JustinR wrote:
Sat Jun 27, 2020 8:29 pm
Love these threads.

"I understand that DCA doesn't make any sense and is mathematically worse than lump sum investing. Should I do it anyway?"
I wonder who said that? You are probably in the wrong thread, perhaps you can direct me to the thread you refer to? That does not seem a very intelligent statement since expected results based on statistics can be very different to actual results for one single event in one's lifetime - as I wrote above (you can find that observation of mine just by scrolling through this thread).
I wrote that LSI works more often than not, but WHEN it does NOT work, it tends to cause more damage (i.e. greater drawdown) than DCA. I posted a link to a graph above showing that. Since I have enough money to live for the rest of my life, I am more concerned about minimizing possible damage if things went haywire than in maximising what I earn if the market keeps going up.
Hence my doubts. I hope I was able to explain this to you - it is not that difficult to understand really.
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Re: lump sum investing vs dollar cost averaging in the present market

Post by sceeerutinizer » Sun Jun 28, 2020 1:04 am

I’m in a similar position, and have decided that in the current relatively volatile market that might be sideways/up-and-down for a while, I will use value averaging rather than lump sum or DCA. I’ve back tested it on my portfolio and it appears to perform better than DCA and in theory should also somewhat reduce risk over LSI.

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Re: lump sum investing vs dollar cost averaging in the present market

Post by JustinR » Sun Jun 28, 2020 5:39 am

Lauretta wrote:
Sat Jun 27, 2020 11:55 pm
JustinR wrote:
Sat Jun 27, 2020 8:29 pm
Love these threads.

"I understand that DCA doesn't make any sense and is mathematically worse than lump sum investing. Should I do it anyway?"
I wonder who said that? You are probably in the wrong thread, perhaps you can direct me to the thread you refer to? That does not seem a very intelligent statement since expected results based on statistics can be very different to actual results for one single event in one's lifetime - as I wrote above (you can find that observation of mine just by scrolling through this thread).
I wrote that LSI works more often than not, but WHEN it does NOT work, it tends to cause more damage (i.e. greater drawdown) than DCA. I posted a link to a graph above showing that. Since I have enough money to live for the rest of my life, I am more concerned about minimizing possible damage if things went haywire than in maximising what I earn if the market keeps going up.
Hence my doubts. I hope I was able to explain this to you - it is not that difficult to understand really.
It's not only that lump sum beats DCA statisically, it's that the premise of DCA doesn't make any logical sense in the first place.

Do you have anything else already invested in the market? A 401k perhaps?

Are you planning on cashing out your entire 401k right now and buying back in over a year? Because that's literally the same thing as lump summing the proceeds from your sold house.

You're treating new cash as something special when actually it's exactly the same as money already invested. This is called mental accounting.

Guess what. DCA is an exercise in mental accounting and emotional trickery. That's all.

However, if your answer is "Yes, I plan on cashing out my entire investment position right now and buying back in along with my house proceeds over the next year", then we can talk about drawdowns.

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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sun Jun 28, 2020 5:45 am

JustinR wrote:
Sun Jun 28, 2020 5:39 am
Lauretta wrote:
Sat Jun 27, 2020 11:55 pm
JustinR wrote:
Sat Jun 27, 2020 8:29 pm
Love these threads.

"I understand that DCA doesn't make any sense and is mathematically worse than lump sum investing. Should I do it anyway?"
I wonder who said that? You are probably in the wrong thread, perhaps you can direct me to the thread you refer to? That does not seem a very intelligent statement since expected results based on statistics can be very different to actual results for one single event in one's lifetime - as I wrote above (you can find that observation of mine just by scrolling through this thread).
I wrote that LSI works more often than not, but WHEN it does NOT work, it tends to cause more damage (i.e. greater drawdown) than DCA. I posted a link to a graph above showing that. Since I have enough money to live for the rest of my life, I am more concerned about minimizing possible damage if things went haywire than in maximising what I earn if the market keeps going up.
Hence my doubts. I hope I was able to explain this to you - it is not that difficult to understand really.
It's not only that lump sum beats DCA statisically, it's that the premise of DCA doesn't make any logical sense in the first place.

Do you have anything else invested in the market? A 401k perhaps?

Are you planning on cashing out your entire 401k right now and buying back in over a year? Because that's literally the same thing as lump summing the proceeds from your sold house.

You're treating new cash as something special when actually it's exactly the same as money already invested. This is called mental accounting.

Guess what. DCA is an exercise in mental accounting and emotional trickery. That's all.
Well first of all it's not the same because of taxes and bid ask spread.
Second, I think emotions are important because a good strategy is the one you can stick to and does not make you too nervous.
Lastly, DCA has the benefit of decreasing the drawdown in case of a catastrophe. So mathematically it does seem to make sense to me, if my aim is to minimize risk (in the sense of maximal draw down) as opposed to maximise the likely (expected) profit.
When everyone is thinking the same, no one is thinking at all

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Re: lump sum investing vs dollar cost averaging in the present market

Post by JustinR » Sun Jun 28, 2020 7:57 am

Lauretta wrote:
Sun Jun 28, 2020 5:45 am
JustinR wrote:
Sun Jun 28, 2020 5:39 am
Lauretta wrote:
Sat Jun 27, 2020 11:55 pm
JustinR wrote:
Sat Jun 27, 2020 8:29 pm
Love these threads.

"I understand that DCA doesn't make any sense and is mathematically worse than lump sum investing. Should I do it anyway?"
I wonder who said that? You are probably in the wrong thread, perhaps you can direct me to the thread you refer to? That does not seem a very intelligent statement since expected results based on statistics can be very different to actual results for one single event in one's lifetime - as I wrote above (you can find that observation of mine just by scrolling through this thread).
I wrote that LSI works more often than not, but WHEN it does NOT work, it tends to cause more damage (i.e. greater drawdown) than DCA. I posted a link to a graph above showing that. Since I have enough money to live for the rest of my life, I am more concerned about minimizing possible damage if things went haywire than in maximising what I earn if the market keeps going up.
Hence my doubts. I hope I was able to explain this to you - it is not that difficult to understand really.
It's not only that lump sum beats DCA statisically, it's that the premise of DCA doesn't make any logical sense in the first place.

Do you have anything else invested in the market? A 401k perhaps?

Are you planning on cashing out your entire 401k right now and buying back in over a year? Because that's literally the same thing as lump summing the proceeds from your sold house.

You're treating new cash as something special when actually it's exactly the same as money already invested. This is called mental accounting.

Guess what. DCA is an exercise in mental accounting and emotional trickery. That's all.
Well first of all it's not the same because of taxes and bid ask spread.
Second, I think emotions are important because a good strategy is the one you can stick to and does not make you too nervous.
Lastly, DCA has the benefit of decreasing the drawdown in case of a catastrophe. So mathematically it does seem to make sense to me, if my aim is to minimize risk (in the sense of maximal draw down) as opposed to maximise the likely (expected) profit.
Have a 401k? IRA?

Lots of opportunities to DCA there without these problems.

I still feel like you don't comprehend or want to admit that having $100k in cash is exactly the same as having $100k invested in your 401k/IRA for DCA.

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Re: lump sum investing vs dollar cost averaging in the present market

Post by Lauretta » Sun Jun 28, 2020 8:29 am

JustinR wrote:
Sun Jun 28, 2020 7:57 am
Lauretta wrote:
Sun Jun 28, 2020 5:45 am
JustinR wrote:
Sun Jun 28, 2020 5:39 am
Lauretta wrote:
Sat Jun 27, 2020 11:55 pm
JustinR wrote:
Sat Jun 27, 2020 8:29 pm
Love these threads.

"I understand that DCA doesn't make any sense and is mathematically worse than lump sum investing. Should I do it anyway?"
I wonder who said that? You are probably in the wrong thread, perhaps you can direct me to the thread you refer to? That does not seem a very intelligent statement since expected results based on statistics can be very different to actual results for one single event in one's lifetime - as I wrote above (you can find that observation of mine just by scrolling through this thread).
I wrote that LSI works more often than not, but WHEN it does NOT work, it tends to cause more damage (i.e. greater drawdown) than DCA. I posted a link to a graph above showing that. Since I have enough money to live for the rest of my life, I am more concerned about minimizing possible damage if things went haywire than in maximising what I earn if the market keeps going up.
Hence my doubts. I hope I was able to explain this to you - it is not that difficult to understand really.
It's not only that lump sum beats DCA statisically, it's that the premise of DCA doesn't make any logical sense in the first place.

Do you have anything else invested in the market? A 401k perhaps?

Are you planning on cashing out your entire 401k right now and buying back in over a year? Because that's literally the same thing as lump summing the proceeds from your sold house.

You're treating new cash as something special when actually it's exactly the same as money already invested. This is called mental accounting.

Guess what. DCA is an exercise in mental accounting and emotional trickery. That's all.
Well first of all it's not the same because of taxes and bid ask spread.
Second, I think emotions are important because a good strategy is the one you can stick to and does not make you too nervous.
Lastly, DCA has the benefit of decreasing the drawdown in case of a catastrophe. So mathematically it does seem to make sense to me, if my aim is to minimize risk (in the sense of maximal draw down) as opposed to maximise the likely (expected) profit.
Have a 401k? IRA?

Lots of opportunities to DCA there without these problems.

I still feel like you don't comprehend or want to admit that having $100k in cash is exactly the same as having $100k invested in your 401k/IRA for DCA.
I wonder whether on my profile it shows that I live in the UK? (and I am form Italy). We don't have 401ks here; (there's an ISA in the Uk but you are very limited in the amount of money you can invest so not suitable for me.) I posted the question in the general section on investing since it's not specific to Europe though.
I see your point though as nisiprius noted in another thread there are some differences too.
I would say that since the market is very volatile and went down, it's a bit like rebalancing to achieve again my target allocaiton to stocks. I have been rebalancing into stocks and I don't do it all in one go, I find it more confortable do it a bit each fortnight. So DCA is probably analogous to my rebalancing habits that make me more confortable.
When everyone is thinking the same, no one is thinking at all

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