[Poll]Which is better: Lumpsum or DCA?

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Which is better: Lumpsum or DCA?

Lumpsum
48
49%
DCA
49
51%
 
Total votes: 97

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555
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[Poll]Which is better: Lumpsum or DCA?

Post by 555 » Sun Feb 05, 2012 8:07 am

Over a 30 year period, Timid Tim and Brave Boris each have $1,000 per month available to invest.

Timid Tim wants to timidly DCA into the market, so
Timid Tim puts $1,000 per month into the market over 30 years.

Brave Boris wants to bravely Lumpsum all $360,000 into the market, so
Brave Boris stores $1,000 per month in a mattress until he has the $360,000 and then Lumpsums it into the market.

Which is better?

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by iceport » Sun Feb 05, 2012 8:36 am

555,

I'm as big an advocate as anybody for DCA under the right circumstances. I firmly believe using DCA is no more a psychological crutch than is selecting an AA with a less than 100% equity allocation. The risk mitigation -- through purchase price diversification -- is real, not a figmnent of the imagination.

However, that risk mitigation comes at an expected cost of having less time invested. That's the trade-off.

Your scenario is not only unrealistic (the decision to lump sum or DCA requires the possession of a lump sum), but there's no contest. Lump summing in the scenario you present would be the worst of both worlds: Boris would be at the mercy of a single purchase price and he'd have way, way less time in the market, not the typical year or so graduated delay with DCA.

There's absolutely no benefit to saving up a lump sum simply to invest it at a single purchase price, rather than diversifying the purchase across multiple purchase prices as the funds become available.

I'm not sure what the intent of the poll is, but it doesn't seem relevant to the DCA vs. lump sum debate. Boris simply has more "bravery" than brains.

--Pete
"Discipline matters more than allocation.” ─William Bernstein

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by nisiprius » Sun Feb 05, 2012 8:41 am

That's not the classic "lumpsum versus DCA" distinction. Are you trying to set up a trick question? I'm not going to answer the poll, but I believe virtually all thoughtful Bogleheads would say that it is better to put the money in as it comes in rather having it earn zero interest for thirty years and then putting it all in on February 5th, 2042 (will the market be open that day?).

Some people, probably not most Bogleheads, might argue that it is better to accumulate in the mattress for a while and then put it all in "when valuations are favorable."

The lumpsum/DCA dilemma doesn't apply to money that's coming in steadily, because investing all of it as soon as it comes in is DCA-ing. The dilemma applies to the situation where you get a sudden windfall, stay $360,000. The question is do you plunk it all in the day the check clears? Put it under the mattress and take out $1,000 a month and invest it? Or something else?

Personally, I'm sympathetic to the idea of a "modified lumpsumming" in which one uses a brokerage's automatic investment feature so that, rather than literally putting it all in one day, you put it in as a relatively short series of smaller purchases. Maybe 1/12 of it every month for a year. Maybe 1/4 of it every week for four weeks. Maybe 1/5 of it each on Monday, Tuesday, Wednesday, Thursday, Friday. Just try to average out some of the really short-term day-to-day fluctuation. I haven't done any simulations on this.
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by tpm871 » Sun Feb 05, 2012 8:44 am

DCA is probably better in this example, since Boris would miss 30 years worth of returns. His money would lose value due to inflation, and he would likely buy at higher prices. But of course there's always an exception -- Boris may have done better in investing in Japan, if he had waited until right after the sharp decline that happened 20 years ago.

Personally, I wouldn't do either. I'd invest regularly by the amounts needed to maintain my AA, selling some shares when my allocation exceeds my bands and buying lots of shares when there's a sharp decline.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by gkaplan » Sun Feb 05, 2012 8:46 am

I agree with nisi. Unfortunately, I answered the poll before I read the original post. I hereby rescind my response.
Gordon

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Boglenaut » Sun Feb 05, 2012 8:53 am

In this scenario, DCA is better. I accidentally hit Lumpsum in the poll and cannot change it.

If they had the $360,000 at the start, then Lumpsum.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by 555 » Sun Feb 05, 2012 8:58 am

nisiprius wrote:That's not the classic "lumpsum versus DCA" distinction. ation.
It may be somewhat simplified, but this is just the standard realistic situation where people gradually have money available to invest over their careers.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Cosmo » Sun Feb 05, 2012 8:58 am

No brainer; ALWAYS DCA.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Boglenaut » Sun Feb 05, 2012 8:59 am

gkaplan,

It looks like this poll is more about testing if Bogleheads actually read a poll before answering it. I suspect we won't be the only two who answer the wrong way because we did not read the question carefully enough before answering. I would guess virtually 100% of people here would say DCA if they read the entire question!

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by iceport » Sun Feb 05, 2012 9:05 am

Boglenaut wrote:I suspect we won't be the only two who answer the wrong way because we did not read the question carefully enough before answering.
And people say those who DCA have the behavioral issues! :shock:

--Pete
"Discipline matters more than allocation.” ─William Bernstein

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by woof755 » Sun Feb 05, 2012 9:10 am

If you have to ask--DCA.
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by nisiprius » Sun Feb 05, 2012 9:19 am

555 wrote:
nisiprius wrote:That's not the classic "lumpsum versus DCA" distinction. ation.
It may be somewhat simplified, but this is just the standard realistic situation where people gradually have money available to invest over their careers.
Well, I'm not sure what you're trying to find out here. If people gradually have money available to them, there is no "lump sum." Saving for thirty years in order to convert a steady income into a lump sum is pretty weird, and I doubt that anyone has ever recommended it. It is not realistic, not even simplified realistic, when you make the period thirty years and when the alternative to investing it is putting it under the mattress.

"Lump summing" refers to the question of how to invest a lump sum that you have received as a lump sum. That's a real-world situation that might occur from inheritance, a severance package, hitting age 59-1/2 and no longer being stuck with the lousy choices in a 401(k), etc.

For investing earned income that comes in steadily, if you want to get a good discussion going, ask: "Is it better to invest all of it automatically every month, or to hold some if it back to use for 'buying on the dips'" (or on Really Bad Days, if livesoft has not trademarked that phrase.
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Sidney » Sun Feb 05, 2012 9:30 am

Boglenaut wrote:gkaplan,

It looks like this poll is more about testing if Bogleheads actually read a poll before answering it. I suspect we won't be the only two who answer the wrong way because we did not read the question carefully enough before answering. I would guess virtually 100% of people here would say DCA if they read the entire question!
Right. The choices as shown are really:

Accumulate with an allocation of 100% equity or accumulate with an allocation of 100% cash and then, against nearly every recommended financial strategy, shift to 100% equity.
I always wanted to be a procrastinator.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by GregLee » Sun Feb 05, 2012 9:48 am

I would put the $1k/month into a money market fund, then after market sell offs, move it into stocks. In fact, that's what I am doing.
Greg, retired 8/10.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by ruralavalon » Sun Feb 05, 2012 9:56 am

I did not vote in the poll.

If you have a lump sum, put it all in at once.

If you have amounts coming in perodically, then DCA.
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by bertilak » Sun Feb 05, 2012 10:19 am

I also rescind my vote since I, too, was tricked by the misuse of the terms "lump sum" and "DCA".

The initial post defines two scenarios, both of which consist of a series of $1000 lump sums. Both scenarios involve lump sum investments of the full $1000 each time it becomes available, the only difference being in the asset allocation used. In one scenario the asset allocation is stated loosely as "the market". In the other scenario the asset allocation is stated specifically as 100% cash. (Alternatively, we can concede that $1000 is too little to be called a "lump" anything, in which case we don't even have a lump sum case to pick as the answer to the poll.)

A long-term investment in cash is not as reasonable as a long-term investment in a more diversified allocation (which I am assuming "the market" implies).

So there is no good answer to the poll. A long-term diversified investment is obviously better for nearly everyone but that is not properly called dollar cost averaging.
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Liquid » Sun Feb 05, 2012 10:29 am

Lumpsum at reasonable valuation, or lumpsum into the total world market. Otherwise DCA.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by SP-diceman » Sun Feb 05, 2012 10:41 am

nisiprius wrote:That's not the classic "lumpsum versus DCA" distinction. Are you trying to set up a trick question?

Thats what I was thinking.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by leoc2 » Sun Feb 05, 2012 1:09 pm

555 wrote:Over a 30 year period, Timid Tim and Brave Boris each have $1,000 per month available to invest.
Timid Tim wants to timidly DCA into the market, so
Timid Tim puts $1,000 per month into the market over 30 years.
Brave Boris wants to bravely Lumpsum all $360,000 into the market, so
Brave Boris stores $1,000 per month in a mattress until he has the $360,000 and then Lumpsums it into the market.
Which is better?
Or this scenario is more realistic.
Over a 15 year period, Timid Tim and Brave Boris each have $2,000 per month available to invest.
Timid Tim wants to timidly DCA into Vanguard index funds into the market, so Timid Tim puts $2,000 per month into the market over 15 years.
Brave Boris has for the last 15 years day traded and position traded tech stocks (in the 90's) and precious metals ( the last 10 years). He has just discovered the boglehead way of life and no longer wants to risk his nest egg which is now $360,000. He wants to bravely Lumpsum the $360,000 into the market using passive index portfolio. , so
Which is better?
2b + Not(2B) that is the boolean question?

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Aptenodytes » Sun Feb 05, 2012 1:18 pm

This is not a question about the relative merits of DCA versus the alternatives. This is a question about cash versus equities.

Frankly, it strikes me as a bizarre question. It is like asking, "What is better, eating a sandwich or hitting your thumb with a hammer?"

Are you seriously considering holding all cash for 30 years?

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by SSSS » Sun Feb 05, 2012 1:44 pm

Troll thread. This is not what lump sum / DCA means. Do not feed.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by umfundi » Sun Feb 05, 2012 2:26 pm

nisiprius wrote: Personally, I'm sympathetic to the idea of a "modified lumpsumming" in which one uses a brokerage's automatic investment feature so that, rather than literally putting it all in one day, you put it in as a relatively short series of smaller purchases. Maybe 1/12 of it every month for a year. Maybe 1/4 of it every week for four weeks. Maybe 1/5 of it each on Monday, Tuesday, Wednesday, Thursday, Friday. Just try to average out some of the really short-term day-to-day fluctuation. I haven't done any simulations on this.
I also will not be answering the poll.

nisiprius,
For the one-year DCA you describe, simulations show Lump Sum is better than DCA 2/3 of the time. The difference is not very large.

Keith
Déjà Vu is not a prediction

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by tpm871 » Sun Feb 05, 2012 2:28 pm

Here's a similar question:

You intend to contribute $17,000 to your 401(k) for the year. Is it better to make equal contributions throughout the year with each paycheck ("DCA") or to contribute most of the first several paychecks of the year until you reach $17,000 ("lumpsum"). Assume that you could afford to do either, and that your company matching contributions are the same either way.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by umfundi » Sun Feb 05, 2012 2:34 pm

tpm871 wrote:Here's a similar question:

You intend to contribute $17,000 to your 401(k) for the year. Is it better to make equal contributions throughout the year with each paycheck ("DCA") or to contribute most of the first several paychecks of the year until you reach $17,000 ("lumpsum"). Assume that you could afford to do either, and that your company matching contributions are the same either way.
It's going to be fun watching another LS vs. DCA debate, this time with confusion about the question thrown in. :confused

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by LazyNihilist » Sun Feb 05, 2012 2:39 pm

I read the question wrong. :oops:

I read it as both having $360,000 and one of them DCA'ing it $1000 per month and the other lumpsuming it right away. For this I answered lumpsuming.

But if the poll was for,
the DCA person putting in all the money as it comes, and the lumpsum person waiting until the end of 30 years and then putting it all at the end of 30 years, this is not a question of DCA vs lumpsuming. It becomes a question of holding cash for 30 years vs investing.
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by bertilak » Sun Feb 05, 2012 2:40 pm

tpm871 wrote:Here's a similar question:

You intend to contribute $17,000 to your 401(k) for the year. Is it better to make equal contributions throughout the year with each paycheck ("DCA") or to contribute most of the first several paychecks of the year until you reach $17,000 ("lumpsum"). Assume that you could afford to do either, and that your company matching contributions are the same either way.
You've got to be in it to win it so the sooner you are "in it" the better off you are. That is, the odds are in your favor. No one can predict specific results or specific favorable time-frames.

Granted, if one COULD make such predictions then one should simply invest as much as possible at the most favorable times.
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by BHCadet » Sun Feb 05, 2012 3:41 pm

I would have done lump sum if all the money is at the beginning.

DCA for the scenarios you described.

Waiting for 30 years to do lump sum is a very bad idea especially there is so much time for the investment to grow or recover when there is a crash.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by umfundi » Sun Feb 05, 2012 4:30 pm

BHCadet wrote:I would have done lump sum if all the money is at the beginning.

DCA for the scenarios you described.

Waiting for 30 years to do lump sum is a very bad idea especially there is so much time for the investment to grow or recover when there is a crash.
If the crash comes early! What if it comes in year 29?

Keith
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by umfundi » Sun Feb 05, 2012 4:32 pm

You've got to be in it to win it so the sooner you are "in it" the better off you are. That is, the odds are in your favor. No one can predict specific results or specific favorable time-frames.
+1 Exactly.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by 555 » Mon Feb 06, 2012 12:46 am

SSSS wrote:Troll thread. This is not what lump sum / DCA means. Do not feed.
It is a serious thread that was supposed to have got you to think.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by 555 » Mon Feb 06, 2012 12:50 am

tpm871 wrote:Here's a similar question:

You intend to contribute $17,000 to your 401(k) for the year. Is it better to make equal contributions throughout the year with each paycheck ("DCA") or to contribute most of the first several paychecks of the year until you reach $17,000 ("lumpsum"). Assume that you could afford to do either, and that your company matching contributions are the same either way.
That is an interesting question (there've been threads on it). But both scenarios you describe are DCAing, since over many years your contributions are approximately uniform.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by bertilak » Mon Feb 06, 2012 8:24 am

555 wrote:
SSSS wrote:Troll thread. This is not what lump sum / DCA means. Do not feed.
It is a serious thread that was supposed to have got you to think.
I agree with SSSS, at least to the point that this is not a meaningful thread. I'll give you the benefit of the doubt that you, personally, are serious in your question and not attempting to be a troll.
  • First it proposes a choice (sit on cash 30 years) that is useless to pretty nearly everyone. Sometimes it does make sense to consider extreme cases that are obviously wrong as a way to demonstrate the folly of less extreme versions of it, but if you think this is what you are doing then ...

    Second The thread title says "Lumpsun or DCA" when neither choice is a lumpsum investment (not even an extreme case of it). What you have called "lumpsum" is actually an extreme case of the *opposite* of lumpsum. The point of lumpsum investing is to invest your available cash at your desired asset allocation as soon as possible. Your scenario delays this as long as possible before doing so.
If your purpose was to make people think about investing strategies I don't believe you have succeeded. Instead you have taught another valuable lesson: read a question *carefully* before answering! It may be a trick question (intentionally so or not).
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Aptenodytes » Mon Feb 06, 2012 8:28 am

bertilak wrote:
  • First it proposes a choice (sit on cash 30 years) that is useless to pretty nearly everyone. Sometimes it does make sense to consider extreme cases that are obviously wrong as a way to demonstrate the folly of less extreme versions of it, but if you think this is what you are doing then ...

    Second The thread title says "Lumpsun or DCA" when neither choice is a lumpsum investment (not even an extreme case of it). What you have called "lumpsum" is actually an extreme case of the *opposite* of lumpsum. The point of lumpsum investing is to invest your available cash at your desired asset allocation as soon as possible. Your scenario delays this as long as possible before doing so.
Exactly so.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by 555 » Mon Feb 06, 2012 9:09 am

Almost nobody is in a position to have a single lumpsum to invest as their sole once only investment, unless they do what Brave Boris does. Obviously what Brave Boris is ridiculous, and that's the whole point. Lumpsumming is almost always a ridiculous thing to do, for any kind of typical income stream.

Actually here's a variation that could be interesting to consider. When you start your first job, borrow as much as you can from the bank, based on your future decades of income stream, and invest that as a lumpsum. But still, it has to be the only investment you ever make to be a true case of lumpsumming.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by empb » Mon Feb 06, 2012 9:18 am

555 wrote:Almost nobody is in a position to have a single lumpsum to invest as their sole once only investment, unless they do what Brave Boris does. Obviously what Brave Boris is ridiculous, and that's the whole point. Lumpsumming is almost always a ridiculous thing to do, for any kind of typical income stream.

Actually here's a variation that could be interesting to consider. When you start your first job, borrow as much as you can from the bank, based on your future decades of income stream, and invest that as a lumpsum. But still, it has to be the only investment you ever make to be a true case of lumpsumming.
Your premises are incorrect. Haven't we done this before?

LS is investing all of your available cash at once. It does not mean investing every penny you'll ever have at once.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by FNK » Mon Feb 06, 2012 9:28 am

555 wrote:Almost nobody is in a position to have a single lumpsum to invest as their sole once only investment, unless they do what Brave Boris does. Obviously what Brave Boris is ridiculous, and that's the whole point. Lumpsumming is almost always a ridiculous thing to do, for any kind of typical income stream.
Right, nobody receives an inheritance, a judgement, sells their company. Wind doesn't fall.
555 wrote:Actually here's a variation that could be interesting to consider. When you start your first job, borrow as much as you can from the bank, based on your future decades of income stream, and invest that as a lumpsum. But still, it has to be the only investment you ever make to be a true case of lumpsumming.
Yep, a kid did exactly that on this forum. Sadly, 2008 wiped him out big time.

You're describing leveraged investing. Borrow at fixed terms, counter with two risky assets (your job and your investments). You increase your expected return, but at the same time maximizing the chance of declaring bankruptcy.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by bertilak » Mon Feb 06, 2012 10:24 am

FNK wrote:Right, nobody receives an inheritance, a judgement, sells their company.
Or was in my situation where I came to the realization that the random collection of stocks, funds and an annuity my "adviser" seeming randomly constructed made no sense beyond generating fees for himself. I took over a month to research the situation, decide on an Asset Allocation and then "lump sum" (all at once) the entire proceeds of liquidating my old account into an account at Vanguard.

To 555: Please note that lump-sum investing is not always from cash to stocks/bonds/etc.. It is *any* significant, deliberate, change in one's asset allocation. Don't ease yourself "one toe at a time" from an AA you consider inappropriate to one you consider appropriate. There is no up-side to remaining, even partially or temporarily, in the wrong AA -- aside from external constraints like conversion rules, taxes, fees, etc..
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by nisiprius » Mon Feb 06, 2012 11:19 am

umfundi wrote:
nisiprius wrote: Personally, I'm sympathetic to the idea of a "modified lumpsumming" in which one uses a brokerage's automatic investment feature so that, rather than literally putting it all in one day, you put it in as a relatively short series of smaller purchases. Maybe 1/12 of it every month for a year. Maybe 1/4 of it every week for four weeks. Maybe 1/5 of it each on Monday, Tuesday, Wednesday, Thursday, Friday. Just try to average out some of the really short-term day-to-day fluctuation. I haven't done any simulations on this.
I also will not be answering the poll.

nisiprius,
For the one-year DCA you describe, simulations show Lump Sum is better than DCA 2/3 of the time. The difference is not very large.

Keith
Yes, but what do those simulations show about the dispersion of outcomes? I believe it to be a risk/reward tradeoff. Take the case where you invest 1/4 each on four consecutive days. Or, perhaps, an ETF where you invest 1/4 each an hour apart. If you make the (big) assumptions that the four values are independent and normally distributed, you've cut the standard deviation of the outcome in half, but you've only reduced your expected return a few days' or hours' worth of the average return of the stock market.

Also, of course, who cares about "2/3 of the time?" I'm sure this isn't at issue here, but it drives me bananas as financial writers love to count wins and losses as if the amount of each didn't matter. And you don't say where the dollars are assumed to be while waiting to invest them. I'm guessing the simulations you refer to assume it's cash-under-the-mattress, whereas in real life it would probably be in a bond fund or something.

But in any case, you say the difference is not very large, which is the important thing.
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Noobvestor » Mon Feb 06, 2012 11:36 am

you've cut the standard deviation of the outcome in half, but you've only reduced your expected return a few days' or hours' worth of the average return of the stock market.
I'm surprised I've never seen this example before. Is 'half' really accurate? I don't distrust your math per se, but if it is right, it's really hard to argue against DCAing over a short period vs. lump-summing all at once.
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by umfundi » Mon Feb 06, 2012 12:49 pm

nisiprius wrote:
umfundi wrote:
nisiprius wrote: Personally, I'm sympathetic to the idea of a "modified lumpsumming" in which one uses a brokerage's automatic investment feature so that, rather than literally putting it all in one day, you put it in as a relatively short series of smaller purchases. Maybe 1/12 of it every month for a year. Maybe 1/4 of it every week for four weeks. Maybe 1/5 of it each on Monday, Tuesday, Wednesday, Thursday, Friday. Just try to average out some of the really short-term day-to-day fluctuation. I haven't done any simulations on this.
I also will not be answering the poll.

nisiprius,
For the one-year DCA you describe, simulations show Lump Sum is better than DCA 2/3 of the time. The difference is not very large.

Keith
Yes, but what do those simulations show about the dispersion of outcomes? I believe it to be a risk/reward tradeoff. Take the case where you invest 1/4 each on four consecutive days. Or, perhaps, an ETF where you invest 1/4 each an hour apart. If you make the (big) assumptions that the four values are independent and normally distributed, you've cut the standard deviation of the outcome in half, but you've only reduced your expected return a few days' or hours' worth of the average return of the stock market.

Also, of course, who cares about "2/3 of the time?" I'm sure this isn't at issue here, but it drives me bananas as financial writers love to count wins and losses as if the amount of each didn't matter. And you don't say where the dollars are assumed to be while waiting to invest them. I'm guessing the simulations you refer to assume it's cash-under-the-mattress, whereas in real life it would probably be in a bond fund or something.

But in any case, you say the difference is not very large, which is the important thing.
nisiprius,

I believe the simulations were simple backtests, starting every month since some date. Invest a lump sum, or invest twelve equal monthly amounts. What is the value one year after the first investment? No assumptions about the cash - under the mattress, presumably.

If you think about it, LS depends only on the first price. DCA depends only on the harmonic mean of the prices. (Note that the LAST price does not matter!) I am sure that someone familiar with signal analysis can give you a better answer than I can, but it seems obvious: If you consider the signal to be some base signal plus noise, any mean will have less variation than the signal itself.

How you separate the base signal and the noise is, I suppose, the behavioral question. I don't recall that I have ever seen "damping the noise" as a justification for DCA.

This graph might be interesting: Plot the signal (whichever stock or index) you choose and the 12-month forward harmonic mean. You will be able to instantly postdict whether you should have started your DCA a year ago. :P

It's too bad you won't have today's data for a year.

Keith
Last edited by umfundi on Mon Feb 06, 2012 1:47 pm, edited 1 time in total.
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Imperabo » Mon Feb 06, 2012 1:10 pm

bertilak wrote:Please note that lump-sum investing is not always from cash to stocks/bonds/etc.. It is *any* significant, deliberate, change in one's asset allocation. Don't ease yourself "one toe at a time" from an AA you consider inappropriate to one you consider appropriate. There is no up-side to remaining, even partially or temporarily, in the wrong AA -- aside from external constraints like conversion rules, taxes, fees, etc..
Excellent points. This all belongs in the wiki.

DCA is nothing more and nothing less than delaying your entry into your desired AA. If you're moving from safe to risky assets then your risk (and expected returns) are reduced during that period. That's it. Really. If that delay helps people sleep then fine, but I say they are better off coming to terms with their own irrationality if they can.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by hollowcave2 » Mon Feb 06, 2012 2:52 pm

The question is not valid. There needs to be a third choice.

That's like asking, Which is better? Chocolate or Strawberry?

It depends on the investor's situation and the investor's profile. So, the right answer is, C) It depends.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Rick Ferri » Mon Feb 06, 2012 3:16 pm

Life is a dollar cost average.

We start with little, we accumulate over time, we then decumulate over time. That's dollar cost averaging. Everyone does it.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Imperabo » Mon Feb 06, 2012 3:48 pm

Many threads would be a lot shorter and make more sense if the op were required to list a clear definition of terms. Most of what we're doing is obliquely and ineffectively arguing over definitions.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by vesalius » Mon Feb 06, 2012 5:06 pm

Bad question, there is no DCA going on in this scenario. Timid Tim is lump sum investing each available dollar as it becomes available ($1000 per month). if he had $12,000 available in January and then invested $1000/month that would be DCA. Under the proposed scenario there is no way for Timid Tim to invest his money any faster than he already is.

Brave Boris is just being dense, he should lumpsum his $1000 available to him at the end of each month as well.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Default User BR » Mon Feb 06, 2012 7:34 pm

nisiprius wrote:That's not the classic "lumpsum versus DCA" distinction.
Good luck trying to reason with 555.



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Re: [Poll]Which is better: Lumpsum or DCA?

Post by 555 » Wed Feb 08, 2012 12:09 am

Rick Ferri wrote:Life is a dollar cost average.

We start with little, we accumulate over time, we then decumulate over time. That's dollar cost averaging. Everyone does it.

Rick Ferri
Exactly.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by umfundi » Wed Feb 08, 2012 12:26 am

Rick Ferri wrote:Life is a dollar cost average.

We start with little, we accumulate over time, we then decumulate over time. That's dollar cost averaging. Everyone does it.

Rick Ferri
I can't imagine a more flawed analogy.

Keith
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Re: [Poll]Which is better: Lumpsum or DCA?

Post by billjohnson » Wed Feb 08, 2012 1:28 am

vesalius wrote:Bad question.

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Re: [Poll]Which is better: Lumpsum or DCA?

Post by Rick Ferri » Wed Feb 08, 2012 7:22 am

umfundi wrote:
Rick Ferri wrote:Life is a dollar cost average.

We start with little, we accumulate over time, we then decumulate over time. That's dollar cost averaging. Everyone does it.

Rick Ferri
I can't imagine a more flawed analogy.

Keith
Think a little deeper and you'll get it. There was a survey on Bogleheads recently that illustrated this perfectly. It compared age to net worth. Not surprising, younger Bogleheads have not accumulated as much wealth as older Bogleheads. Life is a dollar cost average.

Rick Ferri
Last edited by Rick Ferri on Wed Feb 08, 2012 7:28 am, edited 1 time in total.
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