That's avery nice site and they seem to use Alpaca on the back-end, who seem to be doing good work.
Many poeple seem to be saying they tried it the simulation out with broad ETFs, and that's a good use case.
But I think many investors advise against DCA, because it results in you increasing expure to companies in trouble, going into bear markets or even bankruptcy. So for the riskier single stocks at least this seems to have a lot of survivorship bias.
If we include some compaies that have done very poorly or gone bankrupt you would get a better picture of the effect of following this plan for individual stocks. You never know!
It is true that investing all at once, rather than DCA, you also lose 100% in a bankruptcy, but "dollar cost averaging" seems to imply that buying at the lower prices (and thus bringing down your average price) is the benefit of the approach. In fact it is sometimes the main danger.
Dollar cost averaging works when you have a steady stream of income that you're contributing to your investments and you have a heavily diversified portfolio.
The reason being that, over a 5+ year investment horizon, a total US market portfolio will average about 6% after inflation.
However, going off of empirics, dollar cost averaging is less preferable when you have a single lump sum. While it's possible that you 'time' the market wrong with your investment, the odds that you'll happen to invest immediately before a sharp down turn are lower than the odds that you'll miss out of rather significant gains by not being invested.
This all assumes that you have a diversified portfolio. If you're trying to invest in single stocks, good luck.
Positive, you are averaging out the risk by spreading out your purchases and averaging into your position.
Negative, time in the market beats timing the market, therefore you are better to have all your money you intend to invest in the market right away so you can enjoy appreciation, dividends etc
If you have a large lump sum to invest it can be better to buy in one go or in a shorter period. However if you earn money over time and look to invest, it makes sense to DCA each month you receive your salary rather than waiting to time the market.
I'm not sure I follow how the investing timeline relates to the exposure to companies "in trouble". Isn't that just about what you choose to invest in? If you pick a bad investment, or get unlucky, or anything else, you'll lose your money. DCA or not.
Thanks for posting. I tried it with stock and bond ETFs SPY and IEF and got the result
"If you had invested $20/week evenly in these assets for the past 5 years, you'd have invested $5,200.00 and have $5,638.09 today, a return of 1.1X."
Usually that would be expressed as a return of 10%, and the return would be reported to the nearest percent. It would nice to allow the user to specify unequal weightings, say $15/week in SPY and $5 in IEF.
A general problem with showing the results of a dollar-cost averaging investment plan is that it gives more weight to later returns in the period, since that is when the most money was invested. It's true that people who are starting from $0 and saving regularly from earnings face this risk. Another simulation that is worth showing is having the full amount invested from the beginning.
I don't understand your "a general problem" statement. I would not consider it a problem to show correct results. Someone saving for retirement just wants to know the course-grained results. Having the chart split those results by the period that funds were invested would make for a very visually cluttered chart. But I agree that it would be interesting to some.
A few years back, I created a simulator that let's you simulate both putting money in - lump sum and incrementally - and also take money out. I'll see if I can find a link to a live version.
Agree with the first point. Either time-weighted return or IRR gives a more meaningful estimate of the return than simply dividing the final value with total amount invested ($5,200).
IMO it's easier and less work to outperform the indices with a combination of passively holding ETFs like VTI / VOO and strategic hedging based on quantitative leading indicators of economic trouble rather than trying to pick individual stocks. It's also more tax-efficient since you can continue to defer gains in the held ETFs while hedging with Section 1256 contract futures or options instead of constantly trading in and out of individual stocks and being hit with a lot of capital gains tax.
My system is down -1.58% this year compared to -17.39% for the SPX for a nearly 16% outperformance margin. I've documented the results and information about it here: https://grizzlybulls.com/models/vix-ta-macro-mp-extreme
1) Your performance chart starts right after the 2009 bear market and includes a huge bull market run up until the current slowdown where it then starts to match SPX. The straight line up until the drop starting in 2021 suggests that your model may not perform so well in the future.
2) You don't include the penalty from all the short term capital gains taxes you're generating.
3) If you can really generate those returns you wouldn't need to sell market timing signals.
PSA: Outside of stat arb and heavily leveraged market making with teams of PhDs, 60% annualized CAGR doesn't exist. In the real world, anything above 10% over the long-term (in-sample over 50 years), is extremely likely to be spurious and won't repeat.
Is this essentially a tuned version of the whole "Shannon's Demon" a.k.a martingale system that makes a run at the HN front page every six months or so?
Somewhat shameless plug, but we’re launching this week so now or never.
If you want to see how a specific asset mix based on your goals performs (e.g. more in cash and BND and less in VT because you have a big home purchase coming up), check out our app at https://livefortunately.com/
Sure, I mean you can DCA into SPY if that's what you like. Some people do want a bit more higher-risk or sector specific approaches.
I personally have 50% going into SPY DCA then a bunch of other bets. Some of them have outperformed SPY, certainly in the bull market. We'll see how they do over 20 years though.
> Hard to beat dollar cost averaging the entire stock market, which is what VTI represents.
Unless you invested in 2021…
The common “wisdom” of dollar cost averaging the market only works for those (1) who never sell (2) continue to have an ever inflating dollar and QE and (3) an ever growing economy
Right now energy prices are 3x-5x a few years ago. That will dramatically reduce growth and may even shrink the economy. Arguably the real economy has been stagnant for quite some time.
Not financial advice, but at the moment I would consider holding cash or other solid assets. Waiting for the energy situation to stabilize then buy in.
You could cost average, but timing the market can produce multiples more gains if your calm / collected, informed and willing to wait.
DCA reduces risks, particularly on the whole market. They said it doesn’t remove risk and it definitely reduces potential upside.
When I started just allocating money into tech stocks I, as a software guy, appreciated return went way, way, way up.
Those Wall St quants can only appreciate M1 so far. They can't see the server farms 5 years out running linux on mac hardware. Or even if they can, they're paid to make decisions every day. "Boss, I'm just going to park it all on hedged and leveraged AAPL derivatives for the next half decade and sit on a beach." Isn't really going to fly.
I mean, it's probably not as clean as you'd like, but it's a ~15 minute exercise in google sheets. Hint: Use the =GoogleFinance command.
Lump Sum is just the rate of return from that date * initial investment.
DCA is just that same lump sum equation but done/averaged out as many times as you've DCAed.
Has anyody done a thourough calculation with statistics and all?
Just from intuition DCA would yield less than one lump if the expectation value is larger than 0. But then there is variance. If the asset is volatile enough that even a short period of DCA investing is bringing down the price a bit, I assume.
DCA gives you the best chance of getting mean/average returns, not the best returns.
If the market goes up year and year then obviously lump sum investing is best, but it doesn't. It goes through periods of over and under performance and then returns the mean.
In any case, it's academic for most us investing from our salaries. DCA isn't a choice.
The benefit of DCA (in my mind) is avoiding market timing risk. Sure, as another commenter pointed out, if a stock is only going up you better just get in and ride it up. But who knows? If you buy at the peak of a bubble, like in January 2022, it's not so great. If you're not studying the market all day, you can't really predict where it's gonna move (or even if you are).
And of course, many of us don't have a big chunk of cash sitting around waiting to get invested.
> Has anyody done a thourough calculation with statistics and all?
Yes. There's a lot of research comparing dollar cost averaging with lump sum investing. Lump sum investing in a diversified portfolio (total market ETF) almost always wins, even in periods where markets are 'overpriced' (e.g., high CAPE 10 ratios).
It's a nice playground. One thing I would do differently though is, allow selecting multiple “categories” of stocks, e. g. both Technology and Finance. Right now selecting one will de-select the other (but you can add more shares from other categories manually).
I'll bite; shouldn't Tesla be lumped with other car manufacturers instead? While tech is a big aspect of their cars, I wouldn't say tech is their primary product. And if electric vehicles and self-driving capability is the discerning factor, then other car manufacturers should be on there as well.
b-lyons|3 years ago
Many poeple seem to be saying they tried it the simulation out with broad ETFs, and that's a good use case.
But I think many investors advise against DCA, because it results in you increasing expure to companies in trouble, going into bear markets or even bankruptcy. So for the riskier single stocks at least this seems to have a lot of survivorship bias.
If we include some compaies that have done very poorly or gone bankrupt you would get a better picture of the effect of following this plan for individual stocks. You never know!
It is true that investing all at once, rather than DCA, you also lose 100% in a bankruptcy, but "dollar cost averaging" seems to imply that buying at the lower prices (and thus bringing down your average price) is the benefit of the approach. In fact it is sometimes the main danger.
zhdc1|3 years ago
The reason being that, over a 5+ year investment horizon, a total US market portfolio will average about 6% after inflation.
However, going off of empirics, dollar cost averaging is less preferable when you have a single lump sum. While it's possible that you 'time' the market wrong with your investment, the odds that you'll happen to invest immediately before a sharp down turn are lower than the odds that you'll miss out of rather significant gains by not being invested.
This all assumes that you have a diversified portfolio. If you're trying to invest in single stocks, good luck.
lui8906|3 years ago
Positive, you are averaging out the risk by spreading out your purchases and averaging into your position.
Negative, time in the market beats timing the market, therefore you are better to have all your money you intend to invest in the market right away so you can enjoy appreciation, dividends etc
If you have a large lump sum to invest it can be better to buy in one go or in a shorter period. However if you earn money over time and look to invest, it makes sense to DCA each month you receive your salary rather than waiting to time the market.
NFA DYOR :)
kareemsabri|3 years ago
GoldenMonkey|3 years ago
Bostonian|3 years ago
"If you had invested $20/week evenly in these assets for the past 5 years, you'd have invested $5,200.00 and have $5,638.09 today, a return of 1.1X."
Usually that would be expressed as a return of 10%, and the return would be reported to the nearest percent. It would nice to allow the user to specify unequal weightings, say $15/week in SPY and $5 in IEF.
A general problem with showing the results of a dollar-cost averaging investment plan is that it gives more weight to later returns in the period, since that is when the most money was invested. It's true that people who are starting from $0 and saving regularly from earnings face this risk. Another simulation that is worth showing is having the full amount invested from the beginning.
I assume you are familiar with https://www.portfoliovisualizer.com/ , a comprehensive investment simulator (that is not a mobile app).
dwmcc|3 years ago
Good callout on custom-weighting, that's on the list to add in the future.
intrasight|3 years ago
A few years back, I created a simulator that let's you simulate both putting money in - lump sum and incrementally - and also take money out. I'll see if I can find a link to a live version.
ctchocula|3 years ago
Havoc|3 years ago
pyrrhotech|3 years ago
My system is down -1.58% this year compared to -17.39% for the SPX for a nearly 16% outperformance margin. I've documented the results and information about it here: https://grizzlybulls.com/models/vix-ta-macro-mp-extreme
thunky|3 years ago
1) Your performance chart starts right after the 2009 bear market and includes a huge bull market run up until the current slowdown where it then starts to match SPX. The straight line up until the drop starting in 2021 suggests that your model may not perform so well in the future.
2) You don't include the penalty from all the short term capital gains taxes you're generating.
3) If you can really generate those returns you wouldn't need to sell market timing signals.
bdkoepke|3 years ago
noduerme|3 years ago
xnx|3 years ago
tunesmith|3 years ago
Just look at it this way - any time you get a sum of money that you intend to invest in the market, invest that entire sum immediately.
DCA just means you regularly/periodically get sums of money that you then invest immediately.
caseyf|3 years ago
https://www.bogleheads.org/wiki/Dollar_cost_averaging
hackernewds|3 years ago
dragontamer|3 years ago
Hard to beat dollar cost averaging the entire stock market, which is what VTI represents.
--------
Rebalancing is done between asset classes. But if you are going to rebalance, it's more efficient to buy target date funds.
turndownsideup|3 years ago
Brain dead DCA + working in tech and getting RSU / ISO re-ups every year means you're just betting only on tech.
Customization allows you to mitigate/ manage some sector risk if you want it.
gerad|3 years ago
If you want to see how a specific asset mix based on your goals performs (e.g. more in cash and BND and less in VT because you have a big home purchase coming up), check out our app at https://livefortunately.com/
I’m traveling today so replies may be delayed.
kareemsabri|3 years ago
I personally have 50% going into SPY DCA then a bunch of other bets. Some of them have outperformed SPY, certainly in the bull market. We'll see how they do over 20 years though.
francisofascii|3 years ago
lettergram|3 years ago
Unless you invested in 2021…
The common “wisdom” of dollar cost averaging the market only works for those (1) who never sell (2) continue to have an ever inflating dollar and QE and (3) an ever growing economy
Right now energy prices are 3x-5x a few years ago. That will dramatically reduce growth and may even shrink the economy. Arguably the real economy has been stagnant for quite some time.
Not financial advice, but at the moment I would consider holding cash or other solid assets. Waiting for the energy situation to stabilize then buy in.
You could cost average, but timing the market can produce multiples more gains if your calm / collected, informed and willing to wait.
DCA reduces risks, particularly on the whole market. They said it doesn’t remove risk and it definitely reduces potential upside.
kube-system|3 years ago
Easy! Dollar cost average a leverage fund that invests in the entire stock market. TQQQ beats SPY over the long term.
unknown|3 years ago
[deleted]
3pt14159|3 years ago
When I started just allocating money into tech stocks I, as a software guy, appreciated return went way, way, way up.
Those Wall St quants can only appreciate M1 so far. They can't see the server farms 5 years out running linux on mac hardware. Or even if they can, they're paid to make decisions every day. "Boss, I'm just going to park it all on hedged and leveraged AAPL derivatives for the next half decade and sit on a beach." Isn't really going to fly.
savrajsingh|3 years ago
bobbob1921|3 years ago
lordswork|3 years ago
Raidion|3 years ago
Lump Sum is just the rate of return from that date * initial investment. DCA is just that same lump sum equation but done/averaged out as many times as you've DCAed.
zhdc1|3 years ago
funnym0nk3y|3 years ago
Just from intuition DCA would yield less than one lump if the expectation value is larger than 0. But then there is variance. If the asset is volatile enough that even a short period of DCA investing is bringing down the price a bit, I assume.
nly|3 years ago
If the market goes up year and year then obviously lump sum investing is best, but it doesn't. It goes through periods of over and under performance and then returns the mean.
In any case, it's academic for most us investing from our salaries. DCA isn't a choice.
kareemsabri|3 years ago
And of course, many of us don't have a big chunk of cash sitting around waiting to get invested.
zhdc1|3 years ago
Yes. There's a lot of research comparing dollar cost averaging with lump sum investing. Lump sum investing in a diversified portfolio (total market ETF) almost always wins, even in periods where markets are 'overpriced' (e.g., high CAPE 10 ratios).
senko|3 years ago
Yes.
Watch https://www.youtube.com/watch?v=X1qzuPRvsM0 and read the papers referenced in the video.
MuffinFlavored|3 years ago
dwmcc|3 years ago
shaftoe444|3 years ago
dwmcc|3 years ago
notpushkin|3 years ago
kareemsabri|3 years ago
amenghra|3 years ago
evelynsalt|3 years ago
I think it is an ad for an app doesn't reinvest dividends either.
kache_|3 years ago
But there's so much randomness in the system it doesn't really matter
Just yeet your money dawg, stop thinking.
bottlepalm|3 years ago
dom96|3 years ago
dwmcc|3 years ago
cj|3 years ago
kareemsabri|3 years ago
lvl102|3 years ago
mouzogu|3 years ago
throwaway290|3 years ago
grubobeats|3 years ago
[deleted]
kareemsabri|3 years ago
sixQuarks|3 years ago
Cthulhu_|3 years ago
dwmcc|3 years ago