Author Topic: Optimal frequency of dollar cost averaging?  (Read 5401 times)

intotherealworld

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Optimal frequency of dollar cost averaging?
« on: January 29, 2016, 08:22:25 PM »
If I am investing in an index fund, is there any data around that shows wether it is best to invest monthly? fortnightly? weekly? daily??? 6 monthly?

terran

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Re: Optimal frequency of dollar cost averaging?
« Reply #1 on: January 29, 2016, 09:14:54 PM »
Actually, lump sum investing has the highest expected return. See https://www.bogleheads.org/wiki/Dollar_cost_averaging

Dollar cost averaging is really just a mind trick to so you don't freak out if the value of your investment goes down. It builds on the idea that people tend to find the fear of loss a more powerful motivator than the possibility of gain.

Your goal when you DCA should therefore be to figure out the fastest way to get the money into the market while still satisfying your psychological need avoid the fear of loss. So what is the shortest amount of time you can DCA your available funds into the market without freaking out if the market drops, and instead feeling comfortable enough to keep going and stick to your plan?

intotherealworld

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Re: Optimal frequency of dollar cost averaging?
« Reply #2 on: January 29, 2016, 09:59:02 PM »
Thank you! That was a very interesting read.

Other than the lump sum required to open a vanguard account I actually don't have a lump sum to invest! It seems the best thing to do will be transfer money to my index fund immediately every time I'm payed (every 2 weeks), rather than holding on to it to invest either every month or week. 


From the article

Quote
Fight The Good Dollar-Cost Averaging Fight | Investopedia http://www.investopedia.com/articles/stocks/07/dca-fight.asp#ixzz3yhULS7JM

Conclusions
DCA does not provide any real kind of guaranteed return and/or risk reduction. And it certainly does not work well in all market situations. Furthermore, research in the area indicates that lump-sum investing tends to perform better over the longer term.

Nonetheless, DCA is far less nerve-wracking than a lump-sum investment, and if there is a major bear market around the corner, it can really pay off. In some situations, it is an ideal way of controlling both risk and stress.


iamlindoro

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Re: Optimal frequency of dollar cost averaging?
« Reply #3 on: January 29, 2016, 10:01:05 PM »
Thank you! That was a very interesting read.

Other than the lump sum required to open a vanguard account I actually don't have a lump sum to invest! It seems the best thing to do will be transfer money to my index fund immediately every time I'm payed (every 2 weeks), rather than holding on to it to invest either every month or week. 

In that case, you are not dollar cost averaging.  You are lump sum investing at regular intervals.  The term DCA is often erroneously used when people mean investing small amounts, as they get them, over time, but that's a mistaken use of the term.

https://en.wikipedia.org/wiki/Dollar_cost_averaging#Confusion

Invest according to your investment policy statement, as soon as you can after being paid.  That's lump sum investing and over time, will statistically perform best (it would only become DCA if you *held* a portion of those funds in order to space out their investment over time).
« Last Edit: January 29, 2016, 10:03:30 PM by iamlindoro »

intotherealworld

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Re: Optimal frequency of dollar cost averaging?
« Reply #4 on: January 29, 2016, 10:04:22 PM »
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In that case, you are not dollar cost averaging.  You are lump sum investing at regular intervals. 

Whoa.

Haha, thank you SO much for clearing that up for me.

Edit: I'm not sure if that sounds sarcastic. I genuinely mean it!! That blew my mind. I had absolutely no idea that my definition of the term was so out!

iamlindoro

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Re: Optimal frequency of dollar cost averaging?
« Reply #5 on: January 29, 2016, 10:20:09 PM »
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In that case, you are not dollar cost averaging.  You are lump sum investing at regular intervals. 

Whoa.

Haha, thank you SO much for clearing that up for me.

Edit: I'm not sure if that sounds sarcastic. I genuinely mean it!! That blew my mind. I had absolutely no idea that my definition of the term was so out!

I wasn't offended, no worries :)

You are not the first (by a long shot!) nor the last (by a long shot!) to use the term in that sense.  Sounds like your plan should work out great.  The less we try to fiddle with our investing plans, the better we all tend to do.

sol

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Re: Optimal frequency of dollar cost averaging?
« Reply #6 on: January 29, 2016, 11:08:52 PM »
It seems the best thing to do will be transfer money to my index fund immediately every time I'm payed (every 2 weeks)

exactly.