dollar cost averaging vs lump sum doesnt seem to matter?

[mathjak107]

this study has been appearing around pertaining to the slight difference in performance between lump sum vs dca.

while dca is the laggard more often than not i can't help but think the results are skewed here in the bottom line difference.

i am not smart enough to due the calculations but the more i think about it the more i believe the 10 year time frames used skew things un-realistically.

in order for dca to be better the time frame has to end up at about where the time frame started .

the odds of a time frame doing that over 10 years is pretty common.

but when you are contributing to a plan most folks are doing it for far longer even approaching 30-40 years. no way are you even close to where the time frames started.

dca has to lag big time, not only because of the amount of money invested early on which is compounding for far longer but the gains over time have been huge with no chance so far of even being close to where you started the time frame..

i can't find any study that actually looked at rolling 30 year periods but it seems to me logically the outcomes will be far far different than the one posted.


http://business.time.com/2012/11/15/...veraging-dumb/

[clifp]

The math is really pretty easy to understand the market goes up approximately 10% a year. If Bill takes his 100K and invest all at once at the end of year 1 he will on average have 110K , if Joe spreads it out of 1 year he will have 105K. The 5K advantage compounds itself at ~10%/year so over 30 year Bill will have $87K more than Joe.

[2B]

The market may go up an average of 10% but what matters is where you buy. If your average cost goes up in a straight line than you would clearly be better off buying in a lump sum at the start of the period. If it goes down 20% and then slowly climbs back up to 10% above the starting point, then the DCA approach wins.

Think of what method would have been better if you were looking at investing in January 2007. What method would have been better starting in January 2009?

The real value of DCA is psychological. If someone dump a big sum in and the market goes down, some people angst over it. If that same person does DCA in an up market, they don't worry about their "lost" gains.

[rbmrtn]

Vanguard did a study https://pressroom.vanguard.com/nonin..._Averaging.pdf

Their conclusion

Clearly, if markets are trending upward, it’s logical
to implement a strategic asset allocation as soon as
possible because it should offer a higher long-run
expected return than cash.

Most of us do not a have a lump sum to invest and wait for 30-40 years. We have to accumulate with savings while w*rking.

[RunningBum]

Quote:

Originally Posted by 2B The real value of DCA is psychological. If someone dump a big sum in and the market goes down, some people angst over it. If that same person does DCA in an up market, they don't worry about their "lost" gains.

And someone who just dumped a big sum in often have more angst if the market drops than someone who has had money in for some time, even though there is no difference--both have their money in the market. The psychology is that it's easier to second guess a decision (to invest) than it is to second guess a non-decision (staying in the market).

[FinanceDude]

There is an old investing saying: "The time to invest is when you have the money"........

"Time in" the market carries the probability of higher returns than "Timing" the market..........

[Texas Proud]

I saw a study like this a couple of decades ago....

And the results make sense...

"The longer one took to invest, the lower the total return. For example, those who invested the entire lump sum on day one outperformed those who took a year to get fully invested two-thirds of the time"

Since I have read that the market goes up 2 days for every 1 day it falls, this ratio seems to hold....


One of the problems that most people have when it comes to investing is that they do not have a lump sum.... that is why DCA is beneficial for them.... it is better to DCA than to build up a lump sum so you can invest....

[Ed_The_Gypsy]

Pick an asset allocation and commit your cash all at once according to it. You will never know which asset class will be the best this week.

[LOL!]

I always laugh at the Vanguard study and other studies that compare LS to DCA. Sure, if one DCA's like the studies suggest then LS comes out ahead on average ahead of DCA_over_one_year most of the time.

However, the "comes out ahead" doesn't tell the whole story and nor does "most of the time". If LS came out head just 50.000001% of the time, then "most of the time" would still be true, but not significant. Even so, LS only comes out head about 2/3rds of the time. That means 1/3rd of the time LS comes out behind DCA.

And how much ahead does LS beat DCA on average? It looks like "ahead" means less than 2% ahead. Some folks pay more than 2% in fees annually.

Armed with that knowledge one can use a different DCA method to beat LS most of the time I would imagine. For example, if one took the windfall and invested 50% now (LS) and 50% with DCA, then the "comes out ahead" would be halved or about 1% over a year on average. Not a big deal for a little psychological insurance.

Or one could invest 50% now and start DCAing the other 50%, but if the market dropped more than 1% since the initial investment, one could LS the rest into the market. Bingo! You are ahead of LSing when the market was 1% higher.

Just ask yourself, during how many rolling 12-month periods was the market ALWAYS higher than at the beginning? Even in 2012 it was amazing that the lowest value of the US market was at the beginning of year, so that was one such case, but that situation did not extend to international stocks.

So in my opinion, the LS vs DCA debate is a joke since it just doesn't seem to matter. It would be nice if some more constructive ways to DCA would be tested versus LS, but then LS would probably lose 95% of the time.

[LOL!]

And then folks come along and say, "Well if DCA is better, why not sell everything now and then DCA in over the next 12 months using your market timing strategy? Isn't holding your positions today the same as LSing into today?"

That's a good argument, but ignores taxes, frequent trading restrictions, resets of long-term positions to short-terms, and mental accounting.

[Gatordoc50]

I look at it similar to a 95% success rate for a surgical procedure. That's sweet, unless you are in the 5%. The risk on lump sum is that you can severely alter your returns if the market tanks. The risk of DCA is it may limit your upside. I DCA if the sum is greater than 1 years worth of expenses. I don't go for home runs.

[target2019]

Quote:

Originally Posted by Gatordoc50 I look at it similar to a 95% success rate for a surgical procedure. That's sweet, unless you are in the 5%. The risk on lump sum is that you can severely alter your returns if the market tanks. The risk of DCA is it may limit your upside. I DCA if the sum is greater than 1 years worth of expenses. I don't go for home runs.

I think along the same lines. The problem with following advice which is based on average performance is that no one set of personal results is the average. I can follow the conventional or recommended advice, but if the results are not so great for me, then I tend to look for other advice.

I know from personal experience that I prefer to invest, say our IRA/Roth, when markets are lower. I don't want to lump sum on Jan. 1, as it depletes our cash too greatly. I prefer to build up our cash reserve (still working), and invest throughout the year.

This is just what I prefer.

[clifp]

Well there is a psychological problem with DCA which isn't discussed.

Many of the folks who are nervous nellies about investing in the market are nervous nellie period.

DCA over 6 months or 12 months gives them 6 or 12 more opportunities for them to not invest, cause the market just went up a lot so it must being going down, or it just went down a lot it is going to keep going down. The market went no where, but I heard that we are going to have a bear market soon, so I won't invest this month.

We check back with them a 6 months later and still 3/4 of the money sitting in cash and 6 month stretches to a year and then to two years. Unless the lump sum is more than 1/3 your net worth,just invest the money and stop torturing yourself.

[steelyman]

Quote:

Originally Posted by Gatordoc50 I look at it similar to a 95% success rate for a surgical procedure. That's sweet, unless you are in the 5%. The risk on lump sum is that you can severely alter your returns if the market tanks. The risk of DCA is it may limit your upside. I DCA if the sum is greater than 1 years worth of expenses. I don't go for home runs.

I agree. I am in the midst of averaging a large sum over a two-year period and the biggest pain is remembering to do it (I am not interested in finance and stocks anymore). I figure the downside is minimized with averaging. I am not trying to be Reggie Jackson.

[RunningBum]

Quote:

Originally Posted by Gatordoc50 I look at it similar to a 95% success rate for a surgical procedure. That's sweet, unless you are in the 5%. The risk on lump sum is that you can severely alter your returns if the market tanks. The risk of DCA is it may limit your upside...I don't go for home runs.

That's not really true. The dip can happen at any time. If you mostly miss a run up early in your year of DCAing and the drop comes once you are most of the way in, you can turn a gain for the year into a loss.

I don't go for home runs either. I use my AA to minimize my risk. My AA balances my reach for high returns while keeping my portfolio at an acceptable risk level. It doesn't make sense to me to have my AA out of balance just because a lump sum came my way for some reason.

[Gatordoc50]

Quote:

Originally Posted by RunningBum That's not really true. The dip can happen at any time. If you mostly miss a run up early in your year of DCAing and the drop comes once you are most of the way in, you can turn a gain for the year into a loss. I don't go for home runs either. I use my AA to minimize my risk. My AA balances my reach for high returns while keeping my portfolio at an acceptable risk level. It doesn't make sense to me to have my AA out of balance just because a lump sum came my way for some reason.

I don't disagree that lump sum can be superior.

[Texas Proud]

Quote:

Originally Posted by target2019 I think along the same lines. The problem with following advice which is based on average performance is that no one set of personal results is the average. I can follow the conventional or recommended advice, but if the results are not so great for me, then I tend to look for other advice. I know from personal experience that I prefer to invest, say our IRA/Roth, when markets are lower. I don't want to lump sum on Jan. 1, as it depletes our cash too greatly. I prefer to build up our cash reserve (still working), and invest throughout the year. This is just what I prefer.

Your example is still DCAing.... it is just based on doing it once a year instead of 6 or 12 times a year....

A lump sum is a lump sum.... you invest it all at one time.... no other investments....


Unless the market is tanking..... like during 2008, 2009 timeframe, lump sum is almost always better.... and when the market is tanking like it was, there are very few people who have the stones to make a lump sum investment....


My advice..... if you have money to invest and want it invested.... invest it ASAP.... if you are holding it for other purposes.... don't.....

[Animorph]

Lump sum investing can be easier if you will end up having several lump sums to invest, for any reason. If it's a once in a lifetime decision, it will either be good or bad. If you get several chances at it you can play the odds and you might have results closer to the averages.

Kind of like extended warrantees. They might be comforting with one big expensive item, but you wouldn't want to buy them for everything. On average they are a losing proposition.