A calculator “proving” that DCA is a flawed methodology.
Thoughts?
I tried it from 1989-2020/2021 starting in either Jan or Sep, DCA is better 13 (jan) or 8 (sep) times. I used relatively recently times since I’m a younger(ish) investor.
Maybe DCA is more of a defensive strategy to prevent bigger losses than otherwise?
Personally, attempting to DCA was one of the reasons I avoided investing in Sep 2021 at the absolute peak. Although the main reason was, I saw the market chaos, saw talk of sector rotation, defensiveness, etc and went into commodities (after the break of war) instead. So perhaps a main value of DCA is to make newer investors more aware of the market situation? Though if it was a bull market I would’ve missed out on spectacular gains.
A calculator “proving” that DCA is a flawed methodology.
Oh, you don’t need a calculator for that.
Just look at year 2. You divided your nest egg into 12 equal parts and put one part a month into the market… and now it’s all in. Whereas if you had put the entire nest egg into the market on day 1, it would be… all in. Except - statistical average here - because you DCA’d you have less than half as much profit in that first year.
And now your slightly-smaller-than-it-might-have-been portfolio is precisely as much at risk as if you had invested the whole thing up front.
So perhaps a main value of DCA is to make newer investors more aware of the market situation?
No, one of the alleged virtues of DCA is that you don’t care what the market is doing. So it serves to justify wilful ignorance.
A smarter approach is to be aware of what’s going on and to decide what to invest in - and when not to invest - based on that. Which, it appears, is what you did.
PLEASE NOTE!
DCA is strictly about investing an existing nest-egg. If you don’t have an existing nest-egg to invest, then you can’t actually dollar-cost average. Sending a piece of your monthly paycheck to your investment portfolio may look similar, but it is not the same thing.
A calculator “proving” that DCA is a flawed methodology.
Thoughts?
What’s the flaw? The article says the flaw is in managing lump sums, not a flaw investing income streams. From the article:
As appealing as that theory is, its advantage looks like a myth, as this calculator shows. It uses market data to let you compare dollar cost averaging with lump sum investing for the start date you specify.
The start date is ALWAYS A PROBLEM. The real problem is that we live on the right edge of price charts and don’t have a clue about what will happen tomorrow. Look how crappy Musk’s starting date to take over Twitter turned out to be. The other practical question is whether you have control over the date when the lump sum will become available.
To solve the starting date issue the authors should have compared ALL starting dates. And how about ending date? Do they talk about that?
One more thing, DCA is a hedging strategy, like insurance. The purpose of hedging and insurance is not to increase yield but to protect the downside and that has a cost. Did they take that into account?
My thinking is that the methodology is terribly flawed.
Flaky as looking at charts might be I think it will give better results for picking a starting date for lump sum investing. The major problem I see with DCA lump sums is that the itch of the FOMO is just too great for most of us, who wants to miss opportunities and to boot to lose money to inflation?
because you DCA’d you have less than half as much profit in that first year.
The above assumes that the year was a bull market. In a bear market the losses would have been less. The long term odds favor a bull market but hedging strategies are designed for bear markets. Again that pesky starting date, what will happen during the next 12 months?
DCA is a simplistic method which ignores the rate of change in either direction
Everyone would like to “buy low and sell high”, but the while concept of this strategy is to hold forever.
Assuming the stock market is cyclical - even if those cycles are a decade or more long, understanding that it is worth more to invest as the price of an equity moves towards and then below the mean, than when it is rising from its mean value, the question is more about where to park money when the trajectory is in the wrong direction than it is about how to divide the lump into twelve piles.
This is more about putting your thumb on the scale than it is about market timing.
The point is that in most years the market goes up, so on average DCA will lose you money.
DCA is more a psychological thing than a financial thing. I tend to be very rational, yet … still I do DCA, and am doing it right now for various things. It’s probably a very strong psychological thing.
Way back in when TMF started, they had a story/example of the perfect timed investor vs the worst timed investor. They invested in the S&P 500 with the perfect investor picking the lowest priced day every year to invest their IRA lump sum and the worst investor picking the highest priced day every year. After 30 years, the difference in CAGR was around 2%, IIRC.
Stressing out over being perfect is probably not worth the time and not worth the anxiety. DCA will put you somewhere between perfect and worst, so maybe 1% less than perfect. Yes 1-2% over the very long haul will make a difference in portfolio size but that is not the main point of the example.
I think the bigger point of DCA is getting you in the habit of investing on a regular basis. Maybe aimed at someone starting out.