[b-lyons]

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.

[zhdc1]

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.

[ASinclair]

> 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.

To be pedantic (this is Hacker News after all), that is not Dollar cost averaging. That's lump sum investing at a regular interval.

Dollar cost averaging assumes you start with a pot of money and you choose to invest fractions of that initial pot over time. This is opposed to lump sum investing in which you'd invest the full pot of money at the start.

[teraflop]

> The reason being that, over a 5+ year investment horizon, a total US market portfolio will average about 6% after inflation.

Leaving aside the issue that past performance does not guarantee future performance:

If you're talking about "averages" based on historical data, then the average annual return over a 5-year period is -- by definition -- the same as the average return per year. The investment horizon doesn't affect the average expected return, but it does affect the dispersion of outcomes around that average.

I think it's a bit irresponsible to say that a 5-year investment "will average" 6%, when the standard deviation of that number is something like 8-10%. Seeing negative real returns over 5 year periods isn't just a theoretical possibility; it's historically fairly common.

[time_to_smile]

> a total US market portfolio *will* average about 6% after inflation.

has and will are very different claims when applied to market behavior.

Yes the US (and global) economy has been in an incredible period of overall growth for many decades. We've had particularly insane growth in the last few years. But I see no evidence that anyone in their right mind should expect that growth to continue indefinitely.

People believe that bear markets are basically a season in the contemporary market place, but there is no reason that cannot be the long term trend. Across the board we're seeing resource and energy constraints.

For every individual asset people are well aware that "past performance does not indicate future returns" but somehow when we consider the combination of all assets we forget all about that.

[senko]

> dollar cost averaging is less preferable when you have a single lump sum

This is mathematically true. Psychologically less so, and that's because of loss aversion.

DCA helps you avoid the unfortunate case where the market tanks right after you've invested everything. In this situation, people can panic, pull out at considerable loss, etc.

As a retail investor, the most challenging part of investing is psychology, and DCA can help in that regard.

[MuffinFlavored]

> The reason being that, over a 5+ year investment horizon, a total US market portfolio will average about 6% after inflation.

I see a lot of talk lately how if the Federal Reserve needs to get the "Federal Funds Effective Rate" to a "not artificially 0-2% low" (like we've had for a while due to various forms of quantitative easing) that stock returns of typical "6% after inflation" with dividends reinvested aren't as likely.

Any thoughts?

https://fred.stlouisfed.org/series/FEDFUNDS

[turndownsideup]

Lump sum broken up in increments is a very simple portfolio of cash and equities.

There is opportunity cost of the cash (inflation is 9% currently). These don't compare the same as apple and oranges.

Mathematically, as long as equity value is always accretive (due to passive flow from pensions) lump sum does win on a raw return basis. This doesn't take account of drawdown management. (Think 3AC)

[lui8906]

DCA has positives and negatives.

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 :)

[hinkley]

If you're in your early 20's and reading along in this thread, I have some wisdom to drop on you:

The real value of investing at a young age is not compound interest and having another 5-10 years of time with part of your money in the market. For most of us our earning potential will keep going up until at least our 40's, so the number of dollars you have later will swamp whatever you can save now.

The real value of starting at 25, 24, 23 is that you only have a little money to invest, and when you lose it, it will subjectively hurt more. If you wait until 30 you'll be gambling a larger pile of cash without those hard won lessons to keep you out of trouble. The money you invest at the beginning increases the effectiveness of the much larger pile of money you can invest 5 years in.

If you read enough personal finance articles, aimed at real humans, you will start to get a feel for the way in which finances, like dieting or time management, has a much larger psychological factor that the objective bean counters dismiss as if the math is all that matters. What matters most is you.

[lotsofpulp]

If you earn money over time, you never had a lump sum to begin with, so of course it makes sense to “DCA” - it is your only option.

It is still time in the market over timing the market, as long as the withdrawal date is far enough out into the future.

[OscarCunningham]

> Positive, you are averaging out the risk by spreading out your purchases and averaging into your position.

If you want to reduce risk it's better to lump-sum invest, but allocate a smaller proportion to stocks.

[kareemsabri]

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.

[GoldenMonkey]

AirBNB did poorly in the simulator. Losing 23% of it's value.