[AznHisoka]

This is why you Dollar Cost Average though. You do the same thing the 3rd and 4th time it happens. It's extremely unlikely there will be a 5th, 6th, etc (if there is, we probably have more important things to worry about like 25% of the world dying)

[ikeboy]

DCA is riskier and has lower returns than lump-sum investing.

[Rury]

>DCA is riskier

Actually no. Risk = Reward. DCA is less risky, but lower returns than lump-sum investing.

As always, you can cherry pick cases when it underperforms and when it outperforms.

[ikeboy]

Nope. Studies show it's riskier.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=820004

>Risk-averse investors who prefer dollar-averaging can accomplish the aim of risk reduction more effectively by lowering the fraction of funds invested in the risky asset and investing them all at once.

If you invest the same total amount of money for a constant exposure to the market measured in funds*time in the market, you have higher risk choosing to rely more strongly on the later years (which is DCA) than evenly spreading out the exposure over time (which is lump-sum investing). Theory is very simple. Lump sum is diversification and DCA is the opposite - diversification is a "free lunch" producing lower risk with higher returns.

[Rury]

The study you cite shows this is only true for when there is a positive expected risk premium, hence the evidence only supports cherry picked cases.

Additionally, if you read it, the paper admits the DA is inherently less risky than LS, so it attempted to even out risk by adjusting the investment amounts between the two methodologies until expected returns were even, and then compared. This method is arguably flawed for fairly evaluating total risk, since the total invested amounts at risk are different - that is, it relies on the reward to balance out the risk (ie. a positive risk premium). As so it's mostly tautological evidence...

[ikeboy]

If there's no expected risk premium, then buying stocks has a 0 expected return, and it clearly doesn't matter how you buy them.

> the total invested amounts at risk are different

Obviously, you need to invest the same amount in total to have a valid comparison. If your argument is that DCA is investing a lower amount, and is therefore lower risk, then the answer is that a lump-sum strategy investing the same amount as DCA is both lower risk and higher return, and therefore strictly better.

[Rury]

>If your argument is that DCA is investing a lower amount, and is therefore lower risk

That's not what I said, in fact the study does the opposite.

>then the answer is that a lump-sum strategy investing the same amount as DCA is both lower risk and higher return...

The problem is that argument only holds true for positive risk premium scenarios. Obviously LS has a potentially higher rewards, because if I bought 100x at $1, and it goes to $2, my reward will better than buying 10x at $1, 10x at $1.10, and so on. Since LS has potential higher rewards, when risk premium is positive, then the reward / risk will also be better with LS. This is a tautology.

The study's evidence only supports these cherry picked cases (positive risk premium scenarios). The market doesn't always have a positive risk premium... it can be also be negative! (like right before a market crash).

You could argue that the risk premium is positive given long enough time frames, or that the market is more often in a positive risk premium state, hence LS is better. But even this is debatable, as no matter how many years of evidence you give, past performance is no guarantee of future results.

If I cherry picked the Nikkei 225 as my case, by comparing LS invested in Jan 1990, vs DCA from then to any timeframe afterwards, DCA would of been less risky than LS at every time frame...

All in all, DCA is a inherently less risky strategy. The study even says so...