On average, we find that an LSI approach has outperformed a DCA approach approximately two-thirds of the time, even when results are adjusted for the higher volatility of a stock/bond portfolio versus cash investments...since the average returns of stocks and bonds exceeded that of cash over the full span in each market. These positive returns are responsible for the relative success of LSI over DCA. This is really quite intuitive—if markets are going up, it's better to put your money to work right away to take full advantage of the market growth. We found that any factors unrelated to market trends had a minimal impact on the results.
Since all sectors of the stock market do not move in tandem, another wrinkle here could be to LSI in the sectors moving up, and DCA into the sectors moving down. Adjust sectors as needed.
Since all sectors of the stock market do not move in tandem, another wrinkle here could be to LSI in the sectors moving up, and DCA into the sectors moving down. Adjust sectors as needed.
Uh huh.
And where do I get the crystal ball that tells me which will move up and which will move down?
My thought for the day -
Aren't we all deciding to lump-sum invest every single day with our existing balances? You could, at any time, sell it all and move to cash (or bonds or whatever), then DCA back in on whatever schedule you like. How is that any different than the classic scenario where you get a windfall, or saved up the money and have just decided to invest it?
Right - but if you don't have the money yet, there really isn't much of a decision to make - obviously I can't invest money I don't have in hand. Usually in academic articles on the topic, regular investing <> DCA. Having the money withheld from your paycheck is more like LSI than DCA - you're pretty much investing as soon as you get the money, assuming you do what most people do, and just declare what funds you want in the 401K. It looks a lot like DCA, but as you point out, you don't actually have the money yet, and the absence of being able to decide is critical to the analysis of which option is better.My thought for the day -
Aren't we all deciding to lump-sum invest every single day with our existing balances? You could, at any time, sell it all and move to cash (or bonds or whatever), then DCA back in on whatever schedule you like. How is that any different than the classic scenario where you get a windfall, or saved up the money and have just decided to invest it?
Yeah, that's true. DCA is really only for money you don't have yet, like deductions from paychecks. If you could take the next ten years' worth of salary deductions and invest them right now, that would obviously be better that DCAing over the next ten years. But since we don't have that option, we DCA.
Since all sectors of the stock market do not move in tandem, another wrinkle here could be to LSI in the sectors moving up, and DCA into the sectors moving down. Adjust sectors as needed.
Uh huh.
And where do I get the crystal ball that tells me which will move up and which will move down?
that's not what the quote implies.
imho it just suggest that you direct new funds towards those assets that became cheaper, relative to the rest of the portfolio.
Uh huh.
Since all sectors of the stock market do not move in tandem, another wrinkle here could be to LSI in the sectors moving up, and DCA into the sectors moving down. Adjust sectors as needed.
Uh huh.
And where do I get the crystal ball that tells me which will move up and which will move down?
that's not what the quote implies.
imho it just suggest that you direct new funds towards those assets that became cheaper, relative to the rest of the portfolio.
Uh huh.
Since all sectors of the stock market do not move in tandem, another wrinkle here could be to LSI in the sectors moving up, and DCA into the sectors moving down. Adjust sectors as needed.
Uh huh.
And where do I get the crystal ball that tells me which will move up and which will move down?
that's not what the quote implies.
imho it just suggest that you direct new funds towards those assets that became cheaper, relative to the rest of the portfolio.
Let's say you've saved some money, and you're ready to invest it for your retirement. Maybe you plan to buy some index funds. You might be scared of investing everything at once—what if your shares plummet the next day?
...
For some people, DCA is less an investment strategy and more a necessity. Most of us don't have a huge lump sum to invest at once, so we save small chunks from our paychecks.
Investing all at once was the better strategy in 552 of 781 possible periods -- more than 70 percent of the time. In addition, in the roughly 30 percent of the instances in which DCA outperformed, the magnitude of that outperformance was less than when following lump-sum investing. Specifically:
- When lump-sum investing outperformed, the average outperformance was $940,301 on the initial $1 million investment.
- During the 229 periods in which DCA did better, the average cumulative outperformance was $769,311.
My thought for the day -
Aren't we all deciding to lump-sum invest every single day with our existing balances? You could, at any time, sell it all and move to cash (or bonds or whatever), then DCA back in on whatever schedule you like. How is that any different than the classic scenario where you get a windfall, or saved up the money and have just decided to invest it?
My thought for the day -
Aren't we all deciding to lump-sum invest every single day with our existing balances? You could, at any time, sell it all and move to cash (or bonds or whatever), then DCA back in on whatever schedule you like. How is that any different than the classic scenario where you get a windfall, or saved up the money and have just decided to invest it?
Yup. I love this viewpoint of it. (Aside from the simplification of tax stuff, but if you aren't selling everything in your 401k/Roth/etc. and then DCAing it in, you are choosing to lump sum every day.)
Well said.
My thought for the day -
Aren't we all deciding to lump-sum invest every single day with our existing balances? You could, at any time, sell it all and move to cash (or bonds or whatever), then DCA back in on whatever schedule you like. How is that any different than the classic scenario where you get a windfall, or saved up the money and have just decided to invest it?
Yup. I love this viewpoint of it. (Aside from the simplification of tax stuff, but if you aren't selling everything in your 401k/Roth/etc. and then DCAing it in, you are choosing to lump sum every day.)
Well said.
This is a simplification of it all that ignores any risk component. Sure, LSI might be better than DCA most of the time, but what happens when it is worse? How much worse can it be, etc.?
United States 1926 - 2011 | |
5th percentile | -$203,776 |
25th percentile | -$ 42,819 |
50th percentile | $ 55,151 |
75th percentile | $151,725 |
95th percentile | $309,133 |
My thought for the day -
Aren't we all deciding to lump-sum invest every single day with our existing balances? You could, at any time, sell it all and move to cash (or bonds or whatever), then DCA back in on whatever schedule you like. How is that any different than the classic scenario where you get a windfall, or saved up the money and have just decided to invest it?
Yup. I love this viewpoint of it. (Aside from the simplification of tax stuff, but if you aren't selling everything in your 401k/Roth/etc. and then DCAing it in, you are choosing to lump sum every day.)
Well said.
This is a simplification of it all that ignores any risk component. Sure, LSI might be better than DCA most of the time, but what happens when it is worse? How much worse can it be, etc.?
My thought for the day -
Aren't we all deciding to lump-sum invest every single day with our existing balances? You could, at any time, sell it all and move to cash (or bonds or whatever), then DCA back in on whatever schedule you like. How is that any different than the classic scenario where you get a windfall, or saved up the money and have just decided to invest it?
Yup. I love this viewpoint of it. (Aside from the simplification of tax stuff, but if you aren't selling everything in your 401k/Roth/etc. and then DCAing it in, you are choosing to lump sum every day.)
Well said.
This is a simplification of it all that ignores any risk component. Sure, LSI might be better than DCA most of the time, but what happens when it is worse? How much worse can it be, etc.?
I think you're missing the point of the hypothetical.
If you think LSI is worse, then you should sell your whole portfolio, and DCA it in over the next 12 months. Then when it's fully invested, sell it all and DCA in again.
By not doing that, you're basically choosing the option of "sell it all, and lump it all in" (by not selling, which is equivalent, minus tax issues/wash sale issues/etc.).
If your argument, in this post, is that LSI has risks, yes, I agree. And you're choosing to embrace those risks when you aren't selling off your portfolio and DCAing it back in, every day you're choosing that.