Comment by SoftTalker
2 months ago
This is the reason dollar-cost-averaging works. You buy less (shares) when the market is high, and more when it is low, without thinking about it and without trying to "time" your transactions (which almost always fails unless you have inside info).
It works in a sense of not timing the market. Lump sum beats dollar-cost averaging - because you have more time in market.
Sure, if you have a lump sum to start with.
But dollar-cost-averaging beats saving up a lump sum and then investing.
I think the phrase you're looking for is "automatic investing" or something, not DCA. DCA is usually framed explicitly as a counterpart to lump sum of an existing pile of money
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Depending on the definition of “beating”. On average investing right away is better but the variance of outcomes is higher.
On average across all investors. Not so much if you invested at the peak of dot.com (would have taken decades to break even) or even the covid bubble.
If dollar-cost-averaging is so great, why don't professional asset managers use this strategy? (Hint: They don't.) I think dollar-cost-averaging is an idea promoted to non-professional investors to help them manage the psychological burden of (initial) paper losses after making an investment. Assuming that very short term stock market performance is essentially random (long term: it is not), then the day after you make an investment is roughly 50/50: Am I up or down? Recall: The human brain wants to avoid losses much more than gains.
Please everyone note that there is a long-standing and somewhat pointless argument over whether or not DCA means “regular monthly contributions” versus “taking a lump sum contribution and dividing it up into contributions over time”.
Strictly speaking time in the market beats timing in the market. If you have a lump sum, the theoretically best option is to put it into an index fund today.
Most people in most situations don’t have one lump sum to invest, so recurrent monthly contributions to retirement accounts is the way to go (and what OP here is advocating).
So what you're saying is you avoid timing the market (which doesn't work) by timing when you buy shares? What?
You buy at a regular cadence, and sometimes it's low and others it's high, but on average you do OK.
No. You invest the same amount of money at a regular cadence throughout the year. The end result is that you obtain less shares when the price is high, and more shares when the price is low. It's explicitly not timing the market.
It's implicitly timing the market. If you have all the money available at the beginning of the year a better strategy is to just invest everything asap.
If you get the money monthly (e.g. from salary) then that's just normal investing and you don't have a choice anyway.
If you think that is some clever strategy then honestly you probably should get professional advice because you have some fundamental misunderstandings of the stock market.
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Dollar cost averaging does not work and has never worked. Because most assets have unlimited upside and unlimited downside. A stock or asset can go ballistic for decades like Apple or Bitcoin, or it can fall to zero value.
There are no mathematical ways of winning investing. If it was that easy, everybody would do it. You can only follow your heart and do your due diligence.
> Because most assets have unlimited upside and unlimited downside. A stock or asset can go ballistic for decades like Apple or Bitcoin, or it can fall to zero value
Spot equities and crypto have limited downside. You put in x, most you can lose is x as you observed. Unlimited downside is not a thing outside certain exotic derivatives.
Even if zero is the bottom, an asset can have unlimited downside. It can go from $0.1 per share to $0.0001 per share and so on without end. Or, with the rational perspective, after 0 the downside does not matter anymore. An asset cannot go below zero, at least the assets I know of. An investment can go below zero and beyond, when you use leverage. But that's a derivative and not an asset, as you've pointed out.
What I mean is that dollar cost averaging is a myth and cargo culting in the world of investment. Let me explain:
Let's say you're "dollar cost averaging" by purchasing an asset during a few years, which fluctuates between $90 and $110. So after some time you have averaged around $100 per share. Now if the asset goes to $5000 next year, what has your dollar cost averaging accomplished? Or if it goes to $3, what has your dollar cost averaging accomplished. Nothing in both cases.
One of the hardest myths about investment, that seems to be impossible to beat out of people's heads even with a sledge hammer, is that there is a proper historical price for an asset and that prices only fluctuate around that price. So you buy when it's under that price and sell when it's over that price. Smart, right? No, it's dumb and the reason why most people trying to invest lose their money. An asset can go down and stay down on a new price level. Or it can go up and stay up on a new price level.
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I didn't mean the upside/downside on your investment, but on the asset. Most investment assets except for bullion can fall to 0. They can also increase without an upper limit, like for example Apple stock. The market being "high" or "low" is not remedied by dollar cost averaging.
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X to 0 is an interesting definition of unlimited.
Unlimited in ratio, I guess.
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