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.
Ok, I spent about an hour on this post, rewrote a bunch of times. Have to think about this stuff carefully.
All us long-term investors are making the LSI choice every day - I agree with that.
DCA simply allows somebody to "ease in" to their desired asset allocation in a risk-averse way. Should their asset allocation be more risk-averse to begin with, then, and use LSI with that allocation? Yeah maybe. Both seem like reasonable strategies to me from a risk-adjusted return perspective.
As to the scenario where somebody gets a windfall, and why wouldn't the advice to DCA (or something similar) apply to somebody who's already invested, I don't think there's a contradiction there at all - the way I see it the person who's already invested should be at the level that they're recommending to the other person
already because they just got there gradually.
As I accumulate assets, my asset allocation will become less risky - it's a gradual change. Think of the conventional wisdom of "your age in bonds" but just instead of age, use "% of the way to your FI number" as a measure of progress toward your desired FI asset allocation (less risky than your current one, right?). A windfall is a step jump in assets, so the allocation/portfolio should become safer in a step jump as well. How that gets implemented could be DCA or a change in the bond portion of the portfolio or a combination of the two.
Of course we shouldn't all go through DCA cycles all the time, but I think we can recognize it as an acceptable strategy for reducing risk at the expense of higher returns in "windfall" type scenarios.