Dollar cost averaging or all at once?

[learnbehumble]

This forum helped me understand that you should invest all at once.

The appeal of DCA is that it offers a Linus blanket, to deal with the fear that you might buy a lot of risky assets just before a market correction. But that market risk is always there, no more so today than 3 months from now or 3 years from now.

If you can only tolerate taking the DCA approach it might mean your current AA is too risky - you don't have the confidence to maintain your current AA with a greater asset base. It should make no difference if you are 60/40 with $500K today and 60/40 with $1M tomorrow. You are taking the same market risk.

[alluringreality]

This forum helped me understand that you should invest all at once.

The Wiki offers a different perspective.
https://www.bogleheads.org/wiki/Managing_a_windfall

[seajay]

25% stock the first year, 50% the next, 75% the next, 100% in the following year and thereafter ... for 30 years, averages 95/5.

Comparing 130 historic years of 30 year 4% SWR and 95/5 stock/gold bettered (ended with more than) 100/0 in 43% of cases.

Averaging in or lumping in is akin to the arguments of whether to hold all-stock or a less aggressive asset allocation. All stock on average yields more, but with greater variations in individual case outcomes, for a not insignificant number lumping in (or all-stock) will have been worse.

[bertilak]

This forum helped me understand that you should invest all at once.

The appeal of DCA is that it offers a Linus blanket, to deal with the fear that you might buy a lot of risky assets just before a market correction. But that market risk is always there, no more so today than 3 months from now or 3 years from now.

If you can only tolerate taking the DCA approach it might mean your current AA is too risky - you don't have the confidence to maintain your current AA with a greater asset base. It should make no difference if you are 60/40 with $500K today and 60/40 with $1M tomorrow. You are taking the same market risk.

That is exactly my point of view, elegantly and concisely expressed.

I would add, if the new money is substantial. it MIGHT affect your desired AA. But again, do it all at once. There is no sense in prolonging the time you are misallocated, no matter how much your target AA might have changed.

[placeholder]

Studies show that lump sum is best on average.
But you are just one data point and are not the average.
There is always a chance of a big market drop soon after your lump sum investment.
Dollar cost averaging (DCA) is maybe not optimal, but it has less risk.

If that were valid then you should sell everything you already have and dca back in or if the risk is too great lower your risk profile permanently and not for a few months.

[Tom_T]

Studies show that lump sum is best on average.
But you are just one data point and are not the average.
There is always a chance of a big market drop soon after your lump sum investment.
Dollar cost averaging (DCA) is maybe not optimal, but it has less risk.

I actually did receive a windfall (inheritance) in 2012.
I chose to invest it over a 6-month period. (not quite in equal amounts or equal sums, but close enough to DCA.)

There is also a chance of a big market drop the day after you complete your DCA investments. Why is that any different? You've just lost 20% of your portfolio. Do you feel better? What if the market kept rising while you were DCA'ing? You'd actually be worse off than if you had lump-summed at the beginning.

The DCA proponent is counting on one scenario: prices remain steady, or go lower, while he is DCA'ing, to minimize the cost basis. I don't see why that is any more likely than the many other possibilities.

There is also the fear that the market is "too high" because of (insert list of economic and global problems here.) Except, I've never known a time when that wasn't the case. A fellow BH'er said it best: it always feels like a bad time to buy. Market up? It's too high. Market down? It's going lower. You will have the same fears once you are completely invested. It's never going to feel "safe."

[bertilak]

Studies show that lump sum is best on average.
...
Dollar cost averaging (DCA) is maybe not optimal, but it has less risk.

Yes, DCA reduces risk but only to the extend it keeps you out of the market.

If you want that kind of risk reduction, DCA is not the way to do it. It is much simpler to simply reduce your market exposure to whatever you think is appropriate. The trouble with DCA is that it only temporarily reduces market exposure, shortly leaving you at what you apparently feared (at DCA start) was an inappropriate allocation.

This is pure math. Studies are not needed to prove 2+2=4 (DCA start) and 2+3=5 (DCA end). If you are shooting for 5 then everything between 4 and 5 is a miss. If 5 is scary at the beginning of DCA it should be even scarier at the end as there will be more at stake. Aiming for something (at DCA end) you intend to miss (even for a while) is inconsistent.

Luckily DCA is only a temporary, and therefore minor, misallocation.

OK, I said all that before got a bunch of "yeah but" feedback. I am trying here (probably futilely) to get past all the "yeah buts" that miss (or ignore) the point.

For those who say "it makes me feel good" I will concede that point except to say one's feelings should based in actual facts. And yes, I know there are those why say "feelings" ARE facts. We live in different worlds so my comments above are addressed to those who live in my world have simply been mislead about the math.

[Tom_T]

For those who say "it makes me feel good" I will concede that point except to say one's feelings should based in actual facts. And yes, I know there are those why say "feelings" ARE facts. We live in different worlds so my comments above are addressed to those who live in my world have simply been mislead about the math.

Psychology of money: loss aversion

A loss is more emotionally impactful than a gain. You lump sum and gain 10%, you feel ok. You lump sum and lose 10%, you feel terrible.

It's not logical - especially with an investment where it's likely the 10% loss will be recovered at some point.

[alluringreality]

Usually behavioral finance frames dollar cost averaging as a way of dealing with regret aversion. A windfall may amount to a single lifetime event for an individual, so it's probably debatable if various personal strategies necessarily indicate how others "should" deal with ambiguity around such a situation. Anyway, here's the leading Google result for dollar cost averaging and regret aversion. Ultimately the strategy merely results in multiple acquisitions, instead of a single cost basis.
https://www.avantisinvestors.com/avanti ... -strategy/

[Lextalionis]

No one ever mentions value cost averaging in these discussions:

Value averaging means investing money each month, based on your investment objectives. Rather than investing a fixed amount every month, you’d invest based on how close you are to your goal at any given point in time.

Investors who use a value averaging strategy first start by determining the value path they need to follow, based on the target they’re trying to reach. The value path is the amount of growth you need to realize over a set time period in order to achieve the larger investment goal.

https://smartasset.com/investing/what-i ... -investing

[kleiner]

I can offer a real example - my own situation earlier this year. My parents passed away within the past couple of years and I received my share of their estate, about $600k earlier this year. At that time, we had reached a NW of around $6M and I was happy with my asset allocation at that time. I used the lump sum approach and invested all of the received money within a couple of weeks in such a manner as to maintain the same asset allocation.

But big windfalls can be a good opportunity to make other kinds of changes. In my case, I used this opportunity to make my overall portfolio more tax efficient by following the guidelines in the wiki (https://www.bogleheads.org/wiki/Tax-eff ... _placement).

[20cm]

No one ever mentions value cost averaging in these discussions

No one mentions it because it amounts to market timing. It's a thinly disguised buy-the-dip strategy.

[bertilak]

For those who say "it makes me feel good" I will concede that point except to say one's feelings should based in actual facts. And yes, I know there are those why say "feelings" ARE facts. We live in different worlds so my comments above are addressed to those who live in my world have simply been mislead about the math.

Psychology of money: loss aversion

A loss is more emotionally impactful than a gain. You lump sum and gain 10%, you feel ok. You lump sum and lose 10%, you feel terrible.

It's not logical - especially with an investment where it's likely the 10% loss will be recovered at some point.

What's illogical is that you are subject to the same loss (or gains) once the DCA period is over. You have not avoided anything, merely delayed the risk, that is, delayed (some of the) investing. "Kick the can down the road" is the idiom, the point of which is the can remains right in front of you. Once you get to the end, the can (risk) is still right there with you but there are no more kicks available.

[learnbehumble]

This forum helped me understand that you should invest all at once.

The Wiki offers a different perspective.
https://www.bogleheads.org/wiki/Managing_a_windfall

That article is written for an individual who might not be emotionally prepared to deal with the windfall. Personally I could handle and execute on a $1M windfall but a $10M one would be overwhelming. That Wiki article is targeted for the latter situation.

[bertilak]

This forum helped me understand that you should invest all at once.

The Wiki offers a different perspective.
https://www.bogleheads.org/wiki/Managing_a_windfall

That article is written for an individual who might not be emotionally prepared to deal with the windfall. Personally I could handle and execute on a $1M windfall but a $10M one would be overwhelming. That Wiki article is targeted for the latter situation.

Agreed. A large enough addition to one's net worth justifies a complete reappraisal of one's investment strategy. Impulse actions should be avoided.

[sailaway]

This forum helped me understand that you should invest all at once.

The Wiki offers a different perspective.
https://www.bogleheads.org/wiki/Managing_a_windfall

That article is written for an individual who might not be emotionally prepared to deal with the windfall. Personally I could handle and execute on a $1M windfall but a $10M one would be overwhelming. That Wiki article is targeted for the latter situation.

This is more fantasy than hypothetical for me, but I am pressure I would deploy $10M according to my AA while looking into how to bets deploy it philanthropically.

[Tamalak]

DCA has zero mathematical basis. If DCA rather than lump sum had better returns or sharpe ratio, then as soon as you were fully invested it would be smart to pull it all out and DCA back in again.

DCA is just a psychological trick for those who can't bear to lump sum. DCA beats NOT investing by a mile, after all.

No matter how big my windfall, I would lump sum it immediately. It wouldn't even be hard. The bigger it is, the more enthusiastically I would want to get it to work.

[bikeeagle1]

DCA has zero mathematical basis. If DCA rather than lump sum had better returns or sharpe ratio, then as soon as you were fully invested it would be smart to pull it all out and DCA back in again.

DCA is just a psychological trick for those who can't bear to lump sum. DCA beats NOT investing by a mile, after all.

No matter how big my windfall, I would lump sum it immediately. It wouldn't even be hard. The bigger it is, the more enthusiastically I would want to get it to work.

Honestly, choosing to DCA instead lump-summing implies a certain amount of willingness to time the market. My earlier suggestion to effectively do both simultaneously is a nod to both philosophies. It all boils down to risk tolerance and how to manage it, something that is unique to each of us.

[bertilak]

It all boils down to risk tolerance and how to manage it, something that is unique to each of us.

It is true that we all make our own, unique, mistakes. This should not excuse those mistakes but instead prod us into avoiding them by understanding them. DCA may give you a false sense of confidence that you have taken your risk tolerance into account, but you can end up at an AA you have already determined is too risky for you.

Tiptoeing into a mistake does not eliminate the mistake.

[nyejos11]

I think of DCA as time diversification.

[Tom_T]

I think of DCA as time diversification.

That is not a thing.

[Toons]

All in
Time Not Timing

[dbr]

This forum helped me understand that you should invest all at once.

The Wiki offers a different perspective.
https://www.bogleheads.org/wiki/Managing_a_windfall

That article is written for an individual who might not be emotionally prepared to deal with the windfall. Personally I could handle and execute on a $1M windfall but a $10M one would be overwhelming. That Wiki article is targeted for the latter situation.

Agreed. A large enough addition to one's net worth justifies a complete reappraisal of one's investment strategy. Impulse actions should be avoided.

Yes, I agree. What that means is that a question about DCA is really a question about the prior step in the plan, knowing what the asset allocation should be. If a person senses possible disaster from investing immediately they should take more time and more study to decide what they want.

I also believe that there is a psychology here that people regret outcomes where the outcome can be related to their volitional acts but don't regret outcomes not related to a definite action on their part. Thus to invest immediately and suffer a loss in the immediate short term produces regret. An investor in the market doing nothing at that very time is unaffected by the market loss because there is no association with decision making by the investor. People don't relate seriously to the logical fact that staying in the market today is a decision to not leave the market today. There is lots of strange asymmetry around investment decisions.