[ytx]

My knee-jerk reaction is to point out that "even if you bought the S&P at the height of the dotcom bubble, the annualized return over the past 24 years was ~5.5% (not including dividends)"

And while I think this line of thinking is still more correct than not, I wonder how much I (and a lot of other folks in the US) are discounting the possibility of a prolonged period without growth.

Despite shocks like in 2000 and 2008, the S&P has spent very little time "underwater" over the past 50 years. But that's not the case if you look at something like the Nikkei, which took until this year to get back to its 1990 peak.

[hn_throwaway_99]

Whether or not they're discounting the possibility of a prolonged period with little growth, the fundamental issue is that this is essentially unknowable, at least to your average investor. The 2 issues I see with this line of thinking (i.e. comparing it to the Nikkei):

1. You wouldn't want to dump 100% of your money in an S&P 500 index fund. There is a reason to diversify.

2. The point of dollar cost averaging is essentially to reduce the risk of dumping all of your money in (or out) at a bad time. Taking your Nikkei example, I'd be curious to see if you looked at, say, investing the same amount of money on the first of the month over a 2 or 3 year period. The amount of time you'd be under water over the past 4 decades would be much less than just looking at any single instance in time.

[ytx]

I don't have monthly data, but as an approximation here's a rough test where you make a one time investment of $1000, either all at once, or equally spaced over 2 or 5 years. This is simulated starting at each year from 1985 to 2005, and we count the number of years underwater starting 5 years after the first year (after $1000 has been put in for all 3 "strategies") up until 2023.

  S&P:
         once  dca_2yr  dca_5yr
  count  25.0     25.0     25.0
  mean    0.7      0.8      0.7
  std     1.8      1.5      1.1
  min     0.0      0.0      0.0
  max     8.0      6.0      3.0

  Nikkei:
         once  dca_2yr  dca_5yr
  count  25.0     25.0     25.0
  mean   11.4     11.5     11.8
  std     9.1      9.5      9.4
  min     0.0      0.0      0.0
  max    29.0     29.0     28.0

So investing at once, the max number of years underwater for the S&P was 8, versus 3 when "dca"ing over 5 years. The average number of years underwater (averaged over when you would've invested) is quite low, while for the Nikkei all metrics look much worse.

[hn_throwaway_99]

Thanks! Curious, how/where did you get the data for this analysis? Also, don't know if you included dividend reinvestment - that has a huge overall impact.

[ytx]

https://www.macrotrends.net/2593/nikkei-225-index-historical...

I did not - adding an optimistic 2% dividend didn't change much for the S&P, but slightly reduced the underwater counts for the Nikkei (max 23, average ~7.5)

[Huppie]

@2: Research on the topic seems to disagree with you. You're not taking less risk, you're just trading one risk for another.

Vanguard Research actually wrote a paper about this called 'Dollar-cost averaging just means taking risk later' [0].

Or if you would like more recent research the paper 'Dollar Cost Averaging v.s. Lump Sum Investing' by Ben Felix [1] is worth a read imho.

0: https://www.passiveinvestingaustralia.com/wp-content/uploads...

1: https://www.pwlcapital.com/wp-content/uploads/2020/07/Dollar...

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