[zhdc1]

Dollar cost averaging works when you have a steady stream of income that you're contributing to your investments and you have a heavily diversified portfolio.

The reason being that, over a 5+ year investment horizon, a total US market portfolio will average about 6% after inflation.

However, going off of empirics, dollar cost averaging is less preferable when you have a single lump sum. While it's possible that you 'time' the market wrong with your investment, the odds that you'll happen to invest immediately before a sharp down turn are lower than the odds that you'll miss out of rather significant gains by not being invested.

This all assumes that you have a diversified portfolio. If you're trying to invest in single stocks, good luck.

[ASinclair]

> Dollar cost averaging works when you have a steady stream of income that you're contributing to your investments and you have a heavily diversified portfolio.

To be pedantic (this is Hacker News after all), that is not Dollar cost averaging. That's lump sum investing at a regular interval.

Dollar cost averaging assumes you start with a pot of money and you choose to invest fractions of that initial pot over time. This is opposed to lump sum investing in which you'd invest the full pot of money at the start.

[jannyfer]

Wikipedia says otherwise:

https://en.m.wikipedia.org/wiki/Dollar_cost_averaging

What you are describing seems to be the Systematic Implementation Plan.

[ASinclair]

I stand corrected.

> Vanguard specifically discusses the confusion in their paper: "We refer to the gradual investment of a large sum as a systematic implementation plan or systematic investment plan. Industry practice is to refer to such strategies as dollar-cost averaging; however, this term is also commonly used to describe fixed-dollar investments made over time from current income as it becomes available. (A familiar example of this form of dollar-cost averaging is regular payroll deductions for investment in a workplace retirement plan.) By contrast, we are describing a situation in which a lump sum of cash is immediately available for investment."

[JustSomeNobody]

> Dollar cost averaging assumes you start with a pot of money and you choose to invest fractions of that initial pot over time. This is opposed to lump sum investing in which you'd invest the full pot of money at the start.

How is this not the same as:

> Dollar cost averaging works when you have a steady stream of income that you're contributing to your investments and you have a heavily diversified portfolio.

My "pot of money" is my salary over the course of my career and my "investing fractions of that pot over time" is twice weekly contributions.

Whether I start with the whole pot or not is of no consequence.

[mbesto]

> Whether I start with the whole pot or not is of no consequence.

Do you get paid your salary a whole year in advance? No.

Thus this distinction is important. As noted in the wikipedia article above the rationale for this has to do with "I have a big load of cash right now, do I just put all of it to work now or slowly over time?"

[JustSomeNobody]

So, I can't do DCA by depositing money 26 times per year and instead can only deposit it once per year?

Let's say my career potential earnings are $1000.00US. Why can I not consider that my bucket of cash (even though I do not have it on my person all at once)?

By depositing 26 times per year, am I not putting my money to work "slowly over time"?

[kareemsabri]

It seems like a distinction without a difference. The investing outcome is identical, so why does it matter that your job pays you out over the entire year.

[mbesto]

The difference is the following:

Scenario 1 [S1]: I have $120,000 in cash.

Scenario 2 [S2]: I expect to make $120,000 in cash over 12 months, equally once a month

On Day 0...

S1 - I have two choices: put all $120k in the market ("lump sum") or DCA is over 12 months.

S2 - I have no choice but to DCA it.

If I choose to DCA in S1, then I could have made more money by lump summing (depending on market conditions). This is basic TVM.

[hinkley]

This is unfortunately not how DCA was explained to me. If you had extra money during the dot-com boom, you were probably taught that investing $400 a month in a fixed set of commodities was dollar cost averaging.

It was almost ten years later that I encountered the notion of portfolio rebalancing specifically mentioned in the context of DCA. Luckily I already had a notion that this might be a good idea, but how you behave when you know something is good is a bit different from how you behave when you suspect it is. I was not being as disciplined about it as I should be.

[teraflop]

> The reason being that, over a 5+ year investment horizon, a total US market portfolio will average about 6% after inflation.

Leaving aside the issue that past performance does not guarantee future performance:

If you're talking about "averages" based on historical data, then the average annual return over a 5-year period is -- by definition -- the same as the average return per year. The investment horizon doesn't affect the average expected return, but it does affect the dispersion of outcomes around that average.

I think it's a bit irresponsible to say that a 5-year investment "will average" 6%, when the standard deviation of that number is something like 8-10%. Seeing negative real returns over 5 year periods isn't just a theoretical possibility; it's historically fairly common.

[time_to_smile]

> a total US market portfolio *will* average about 6% after inflation.

has and will are very different claims when applied to market behavior.

Yes the US (and global) economy has been in an incredible period of overall growth for many decades. We've had particularly insane growth in the last few years. But I see no evidence that anyone in their right mind should expect that growth to continue indefinitely.

People believe that bear markets are basically a season in the contemporary market place, but there is no reason that cannot be the long term trend. Across the board we're seeing resource and energy constraints.

For every individual asset people are well aware that "past performance does not indicate future returns" but somehow when we consider the combination of all assets we forget all about that.

[rr888]

As a non-American I can't believe how much faith people put in the stock market here. I think they're going to be a rude shock the next few decades.

[hnfong]

It's pretty easy to believe if you consider how US stocks outperformed basically stocks of every other developed country for the past decade...

[zhdc1]

The underlying issue with "saving" is that the monetary system is setup in a way that forces you to invest in productive assets.

Cash, as a store of value, is awful. You're guaranteed to lose 2-3% a year.

The question becomes what, exactly, can you do with cash. In countries where most or all industries are at their or near their productivity frontiers, you have two options. You either try to push the productivity frontier out and capture as much of the resulting value as you can, or you "lend" your assets to other people or groups of people who are attempting to do so.

The issue with either option is that innovation is inherently difficult. Failure is a real possibility and success generally requires a sustained level of effort.

The benefit that the second option gives you is the opportunity to place a large number of bets without having to also actively engage in the actual innovation. That is, you have the opportunity to passively invest in a diversified portfolio.

Now, if you take the second option, the question becomes how, exactly, do you invest. There are a couple of different options here. First, you can invest in an organization that captures rents from all of the economic activity according to some criteria. This is what you do when you invest in government bonds. You're essentially placing a bet that tax revenue will grow over time, which itself is a bet that - all else being equal - the economic activity of all of the individuals and companies that pay taxes will also grow over that period of time.

Second, you can attempt to purchase individual assets. Here you're making a directional bet that the value produced by that asset will grow over time. Real estate falls into this category (although real estate is by no means passive), as do corporate bonds and stocks.

The issue with this option is that the distribution of companies that successfully create additional economic value is extremely skewed. A small number of companies succeed. Those that succeed generally don't continue to do so over time. The rest either tread water or go out of business. Now, the other issue is that there is little to no evidence that individuals are able to successfully pick in advance which companies will actually to generate additional economic value - before - others do so. That is, it's extremely difficult to outperform the market.

Third, you can invest in a large number of companies according to some screen or criteria. This is essentially what you're doing when you invest in a total market fund. That is, knowing that a large number of organizations are trying to expand their productivity frontiers and that most of them will either fail to innovate or capture the resulting value, you 1. eliminate those that are most likely to fail and 2. place a bet that some percentage of the remaining companies will succeed. This approach has historically produced returns of around 6% in the United States.

> As a non-American I can't believe how much faith people put in the stock market here. I think they're going to be a rude shock the next few decades.

Going back to my original point, money is a bad store of value. Given that almost all investable assets (including government debt) are somehow tied to economic growth, it's just a question of where in the value chain do you want to place your bets, and do you feel that you're competent enough to successfully place directional bets on individual assets (evidence shows that, without active involvement, this is essentially a loser's bet).

You have to invest in something. The question is, what, exactly, are you going to invest in?

[rr888]

I agree, I think my problem is that the last few decades the returns on stocks and property has vastly exceeded economic which means that a) people have unrealistic expectations going forward and b) prices are bid up so high its likely future returns will be flat or negative for decades.

[zhdc1]

> I think my problem is that the last few decades the returns on stocks and property has vastly exceeded economic

I agree that speculative returns are higher now than they have been in some/many historical periods. It's very likely that this will depress returns in the future, but to what extent is anyone's guess.

However, it's hard to construct a thesis that has US equity returns at or below 0 over a long period fo time. For that to happen, some combination of the following would also have to occur:

1. Population decline leading to a corresponding decline in economic activity. US demographics are projected to be better than most other developed countries for the next several decades. The US is also a destination for highly educated immigrants. Finally, large US companies are international and can (and will) take advantage of growing markets in South Asia and Africa.

2. Severe economic decline brought about by war, civil unrest, or an existential crisis. This is extremely hard to imagine. Short of a conflict with China or another pandemic, there is little reason to believe that economic activity in the US collapse in the immediate future.

3. Speculation was so high that a resulting return to the mean significantly reduces long term equity prospects. I agree that there is a certain amount of speculation in the market (although the mechanisms are different from what happened in the early-00s). However, valuations are no longer significantly high by historical standards. High, yes, but not to the point where mean reversion would suggest a multi-decade depression in equity returns.

[hnfong]

> it's hard to construct a thesis that has US equity returns at or below 0 over a long period fo time

> there is little reason to believe that economic activity in the US collapse in the immediate future

> not to the point where mean reversion would suggest a multi-decade depression in equity returns

I don't see how you're ruling out a scenario where the US economy can't keep up with expected growth and stagnates for a couple decades. You rightly claim that it's unlikely in the "immediate future", but 20 years from now? A pandemic already happened, why would it be "extremely hard to imagine" another more serious one happening soon?

To repeat the GP's comment: As a non-American I can't believe how much faith people put in the stock market here. I think they're going to be a rude shock the next few decades.

[senko]

> dollar cost averaging is less preferable when you have a single lump sum

This is mathematically true. Psychologically less so, and that's because of loss aversion.

DCA helps you avoid the unfortunate case where the market tanks right after you've invested everything. In this situation, people can panic, pull out at considerable loss, etc.

As a retail investor, the most challenging part of investing is psychology, and DCA can help in that regard.

[zhdc1]

> As a retail investor, the most challenging part of investing is psychology, and DCA can help in that regard.

Agree 100%.

[MuffinFlavored]

> The reason being that, over a 5+ year investment horizon, a total US market portfolio will average about 6% after inflation.

I see a lot of talk lately how if the Federal Reserve needs to get the "Federal Funds Effective Rate" to a "not artificially 0-2% low" (like we've had for a while due to various forms of quantitative easing) that stock returns of typical "6% after inflation" with dividends reinvested aren't as likely.

Any thoughts?

https://fred.stlouisfed.org/series/FEDFUNDS

[turndownsideup]

Lump sum broken up in increments is a very simple portfolio of cash and equities.

There is opportunity cost of the cash (inflation is 9% currently). These don't compare the same as apple and oranges.

Mathematically, as long as equity value is always accretive (due to passive flow from pensions) lump sum does win on a raw return basis. This doesn't take account of drawdown management. (Think 3AC)