dmcmahon wrote:The issue is investor psychology, not expected return. People are inclined to feel pain at losses more keenly than feel joy at gains.
And rightly so, in my opinion. It is not a matter of some irrational (aka psychological) fear. There are losses that simply cannot be tolerated. Expected return does not take into account all relevant factors, including the extremes away from the average. Once something happens, you cannot take it back.
The key to DCA is the "A" -- "Averaging". The average is not as extreme as individual events, and it is the extremes that are at issue.
If those losses can't be tolerated, the proposed AA is arguably not appropriate. As you and others have noted, that risk doesn't go away as a result of DCA.
If you have a wad of cash and choose to DCA, what you are doing is averaging one AA with another AA. This indicates a fear of the ultimate AA.
If you have periodically available cash, DCA of asset prices is the result of the activity, but represents a different kind of averaging. In this context you are always adding to your portfolio at the target AA.
Asset allocation (AA) is one way to "average out" the extremes. DCA is another. Just because one is effective (AA) does not mean the other (DCA) isn't.
IMO they are not the same at all.
Also, neither AA nor DCA is guaranteed to be 100% effective. Someday someone will get hurt in the market despite following best practices. Still, we strive for best practices. Anyone can get hit by a bus, even if they look both ways!
Well of course. If it was guaranteed, there would be no risk and therefore no risk premium. But if you define risk appropriately, I don't think DCA helps to reduce risk.
AA = average across space (sectors).
DCA = average across time.
You get DCA for "free" as you invest funds that become available periodically.
Funds you don't have are not really being risked and therefore are not the same as funds you keep in cash as you slowly DCA into your AA. DCA as part of periodic investment RESULTS in DCA, but is not a justification for DCA.
If a lump sum of funds becomes available all at once, should we give up on DCA?
Yes. :lol: Develop an AA that is appropriate and then (as someone else said) invest as fast as your emotions will allow.