Even God Couldn’t Beat Dollar-Cost Averaging

[REWahoo]

Even God Couldn’t Beat Dollar-Cost Averaging is a number crunching, chart heavy blog post by Nick Maggiulli on his "Of Dollars and Data" blog site. It is a detailed look at the historical success of DCA vs Buy the Dip investing.

This is the last article you will ever need to read on market timing. It’s a bold claim, but I’m not messing around.

Imagine you are dropped somewhere in history between 1920 and 1979 and you have to invest in the U.S. stock market for the next 40 years. You have 2 investment strategies to choose from.

Dollar-cost averaging (DCA): You invest $100 (inflation-adjusted) every month for all 40 years.

Buy the Dip: You save $100 (inflation-adjusted) each month and only buy when the market is in a dip. A “dip” is defined as anytime when the market is not at an all-time high. But, I am going to make this second strategy even better. Not only will you buy the dip, but I am going to make you omniscient (i.e. “God”) about when you buy. You will know exactly when the market is at the absolute bottom between any two all-time highs. This will ensure that when you do buy the dip, it is always at the lowest possible price.

Spoiler alert: Even if you know when the low is reached and that's when you buy, DCA still "wins".

One of his closing lines:

I hope it makes you re-consider having “cash on the sidelines” ever again.

 

[Bigdawg]

Even God Couldn’t Beat Dollar-Cost Averaging is a number crunching, chart heavy blog post by Nick Maggiulli on his "Of Dollars and Data" blog site. It is a detailed look at the historical success of DCA vs Buy the Dip investing.





Spoiler alert: Even if you know when the low is reached and that's when you buy, DCA still "wins".

One of his closing lines:

Don't have time to dig into this right now but I will over the next week or so while on vacation. It seems to me that if I put the 100 into the market on the lowest market day each month I would beat the dollar cost average approach. That's probably not the exact methodology used. Can't wait to dig into this one.

 

[ERD50]

Very interesting. Especially considering the "God" angle, getting every dip exactly right. Wow, I did not expect that.

I'll look closer later, but it didn't look like he had the cash earning anything at all while it was sidelined? I wonder if that would make any difference? It could be in a Total Bond fund, or maybe a short term fund, that can be liquidated quickly. But off-hand, it does not look like it would make a huge difference, and that is still with the "God" advantage.

That would be academic. I already know you'd have to be pretty good at picking the high and low, better than I figure I could be (no where near perfect), and I can't take the risk of getting it wrong, so I'm already convinced.

-ERD50

 

[steelyman]

DCA is a real benefit to those (like myself) who have/had the luxury of a good payroll department that makes it easy to put away the money before it ever hits your leaky wallet.

Self-employed friends of mine who have all the best intentions and smarts find it difficult to maintain the discipline.

 

[ERD50]

Don't have time to dig into this right now but I will over the next week or so while on vacation. It seems to me that if I put the 100 into the market on the lowest market day each month I would beat the dollar cost average approach. That's probably not the exact methodology used. Can't wait to dig into this one.

No. Per the quote in the OP, you buy " when the market is at the absolute bottom between any two all-time highs.".

-ERD50

 

[Scrapr]

I thought the phrase was Even God couldn't hit a 1 iron. "Lee Trevino"


Trevino's Top 5 Quotes
These are five of the best-known quotations ever uttered by Lee Trevino (or any other golfer, probably):

"You can talk to a fade but a hook won't listen."
"If you are caught on a golf course during a storm and are afraid of lightning, hold up a 1-iron. Not even God can hit a 1-iron."
"You don't know what pressure is until you've played for $5 a hole with only $2 in your pocket."
"I've never had a coach in my life. When I find one who can beat me, then I'll listen."
"There is no such thing as a natural touch. Touch is something you create by hitting millions of golf balls."

 

[RunningBum]

Note that this has nothing to do with DCA vs. lump sum investing. I'll bet some use this to exclaim that DCA is the superior strategy over lump sum.

It assumes you have $100/month to invest, and either invest automatically, or on dips (not at an all-time high). My guess is that the money is kept under the mattress when he's not able to purchase according to his rules. If you allowed the prevailing MM or savings account rate to be applied to the put aside money like anyone would do, it would probably do better in most cases.

 

[CardsFan]

Note that this has nothing to do with DCA vs. lump sum investing. I'll bet some use this to exclaim that DCA is the superior strategy over lump sum.

It assumes you have $100/month to invest, and either invest automatically, or on dips (not at an all-time high). My guess is that the money is kept under the mattress when he's not able to purchase according to his rules. If you allowed the prevailing MM or savings account rate to be applied to the put aside money like anyone would do, it would probably do better in most cases.

I think the point of the blog is that you are better DCA than trying to Market Time. With the point being, even if you are a perfect market timer, your odds are not good. And no one is a perfect market timer.

As one who has FIRE'd based on monthly investments for the past 30 years, I can't argue with the conclusion.

 

[RunningBum]

I think the point of the blog is that you are better DCA than trying to Market Time. With the point being, even if you are a perfect market timer, your odds are not good. And no one is a perfect market timer.

I understand the point of the blog. I just know there are a lot of people who read headlines only, and latch onto it and read a lot more into it than the blog says.

I'd also like to know more about this "perfect" market timing strategy. As I said, if they left money totally uninvested, not even in a savings account, for long periods, that's not so perfect.

Figures don't lie, but liars figure.

 

[RenoJay]

I just read that article on Market Watch. It uses the time period 1920-1979. I'm curious how the results would look if it included recent history. We've had two massive bubbles in 20 years that I think might affect the outcomes a bit.

 

[Sunset]

Note that this has nothing to do with DCA vs. lump sum investing. I'll bet some use this to exclaim that DCA is the superior strategy over lump sum.

It assumes you have $100/month to invest, and either invest automatically, or on dips (not at an all-time high). My guess is that the money is kept under the mattress when he's not able to purchase according to his rules. If you allowed the prevailing MM or savings account rate to be applied to the put aside money like anyone would do, it would probably do better in most cases.

But isn't it ?

Yes, he is not comparing having $20K to invest today, or put $100 of it in per month. But once you do that, then next month it's pretty common for people to have $x they could invest, but let it slide as the market is high.

I did this back some time after the market had come up a few thousand points. I had accumulated some $$$, but I thought, I'll wait until the market drops again... it didn't and after 2 YEARS !! , I finally capitulated and threw it in.
I'm glad I did as the market never went bear again for many years....

I still do this as I'm lazy, each month, I could check my accounts, round up all the div payments and buy more stock ( I get zero fees, so no cost), but I don't, which is stupid according to this blog.

 

[RunningBum]

I just read that article on Market Watch. It uses the time period 1920-1979. I'm curious how the results would look if it included recent history. We've had two massive bubbles in 20 years that I think might affect the outcomes a bit.

40 year period starting anytime between 1920 and 1979. Not sure if they always started on Jan 1 of each year, or anytime in the year. The 1979 start takes us to end of 2018.

 

[Sunset]

I just read that article on Market Watch. It uses the time period 1920-1979. I'm curious how the results would look if it included recent history. We've had two massive bubbles in 20 years that I think might affect the outcomes a bit.

If you read the original blog, he does review over various time frames, God does win sometimes.

 

[ERD50]

...As I said, if they left money totally uninvested, not even in a savings account, for long periods, that's not so perfect.

Figures don't lie, but liars figure.

I agree the study would be better if the sidelined cash was invested. But I doubt it would change the results much. The biggest accumulation for cash was 2000-2009, so you could figure how much growth that would have at prevailing fixed income rates. The next accumulation period was not so large.

Yes, it would help, but of course, no one could time the dips that close, so make some adjustment for that. He did that later, and said you get within 2 months of the dip, and even that would me miraculous, I think.

Ten years accumulated at 3% interest would compound to 18% more than at 0%. That would be significant at 2009, but not so much in the next dip-buy, as cash accumulation was much smaller than the total portfolio.

-ERD50

 

[Gumby]

I just read that article on Market Watch. It uses the time period 1920-1979. I'm curious how the results would look if it included recent history. We've had two massive bubbles in 20 years that I think might affect the outcomes a bit.

There wouldn't be 40 years of data for anything starting after 1979.

 

[LOL!]

Although the first sentence is:

This is the last article you will ever need to read on market timing.

all one could conclude was: Don't do market timing like this guy studied.

But we already knew not to do market timing like this guy studied.

 

[audreyh1]

Even God Couldn’t Beat Dollar-Cost Averaging is a number crunching, chart heavy blog post by Nick Maggiulli on his "Of Dollars and Data" blog site. It is a detailed look at the historical success of DCA vs Buy the Dip investing.

Spoiler alert: Even if you know when the low is reached and that's when you buy, DCA still "wins".

One of his closing lines:

I hope it makes you re-consider having “cash on the sidelines” ever again.

In this article's case "cash on the sidelines" refers to cash set aside to invest later waiting for a dip. Not extra cash for living expenses.

 

[mrfeh]

Although the first sentence is:

all one could conclude was: Don't do market timing like this guy studied.

But we already knew not to do market timing like this guy studied.

Yes, but many people think they can beat the market by timing it.

Numbers & statistics & studies will not change their minds.

 

[donheff]

I wonder how a "pull from the peaks" strategy compares to a reverse DCA in retirement.

 

[audreyh1]

I wonder how a "pull from the peaks" strategy compares to a reverse DCA in retirement.

If you use a %remaining portfolio withdrawal method which includes methods such as VPW, this feature is sort-of built in. No, it won’t actually pull out funds on the peak for the year, but it does pull out more when markets are higher and less when markets are lower, so I tend to view it that way.

 

[Huston55]

In this article's case "cash on the sidelines" refers to cash set aside to invest later waiting for a dip. Not extra cash for living expenses.

Correct.

It’s an interesting read, especially for someone in the ‘accumulation’ mode. But, less interesting (and likely less applicable) for someone in the ‘decumulation’ mode, as it doesn’t account for:

- MPT & the AA we each use
- Returns on the ‘cash’ (which are, in fact, just very short term FI investments)
- The behavioral benefits of holding [-]cash[/-] short-term FI

 

[NW-Bound]

If God wanted to play market timing, he would not just "buy the dip". He would also "sell at the peak", and go "all in" when it was right.

His performance would be something completely different than what the article shows. Just look at the charts in the article, and one can see that.

Not that someone could be God like.

 

[audreyh1]

If God wanted to play market timing, he would not just "buy the dip". He would also "sell at the peak", and go "all in" when it was right.

His performance would be something completely different than what the article shows. Just look at the charts in the article, and one can see that.

Not that someone could be God like.

Excellent point!

 

[NW-Bound]

For someone who is young and still accumulating, DCA via 401k contribution is the right way to do. I did that in my working years, and the only regret is not being more heavy in stocks.

Being a retiree in the spending phase, I am more interested in seeing the performance difference between "hold-and-sell" vs. "rebalance" strategies. But that of course is not the subject of the article, and out-of-topic.

 

[Huston55]

Being a retiree in the spending phase, I am more interested in seeing the performance difference between "hold-and-sell" vs. "rebalance" strategies. But that of course is not the subject of the article, and out-of-topic.

IIRC, Otar did some of this (at least the rebalancing strategies part) in his book “Unveiling the Retirement Myth.”