This is the reason dollar-cost-averaging works. You buy less (shares) when the market is high, and more when it is low, without thinking about it and without trying to "time" your transactions (which almost always fails unless you have inside info).
I think the phrase you're looking for is "automatic investing" or something, not DCA. DCA is usually framed explicitly as a counterpart to lump sum of an existing pile of money
DCA in my understanding is automatically investing a fixed amount at fixed intervals. E.g. $100/month, or whatever. The amount and interval aren't all that critical. The point is to do it automatically and not try to time the market.
Yes I also have heard the advice to dollar cost average a lump sum, not so much in the scenario of a rollover of an existing investment, but when a large amount of cash has become available for some reason. I guess the theory there is you won't risk putting it all in at a market high point. If you average it in over a year in a declining market, you're better off. If you average it in to a rising market you're worse off than if you had invested it all up front. Trying to guess which of these scenarios is going to happen is trying to time the market. I'm sure people have done the research -- intuitively, if you're investing for the long term, better to put it all in at once. But there are probably risk tolerance considerations.
A year is pretty extreme. If you cut a lump sum into a series of transactions over a couple weeks or even days it is just about the least expensive way to exchange earning potential for reduced volatility. You miss out on like 2 weeks of earnings in exchange for a huge reduction in the chance that you buy in and are immediately down 2% or something.
You can do both. You can invest the entire amount, but make it short/medium bond heavy on Day 1. As you go thru the year, you rotate more and more of your fixed income allocation towards equity until you reach your target equity %. This is relevant if, for example, you downsized your home or received a retirement payout.
It's not the big swings you're trying to avoid, you're just trying to average together a bunch of interday minor ups and downs so your starting price is not as volatile.
If dollar-cost-averaging is so great, why don't professional asset managers use this strategy? (Hint: They don't.) I think dollar-cost-averaging is an idea promoted to non-professional investors to help them manage the psychological burden of (initial) paper losses after making an investment. Assuming that very short term stock market performance is essentially random (long term: it is not), then the day after you make an investment is roughly 50/50: Am I up or down? Recall: The human brain wants to avoid losses much more than gains.
Please everyone note that there is a long-standing and somewhat pointless argument over whether or not DCA means “regular monthly contributions” versus “taking a lump sum contribution and dividing it up into contributions over time”.
Strictly speaking time in the market beats timing in the market. If you have a lump sum, the theoretically best option is to put it into an index fund today.
Most people in most situations don’t have one lump sum to invest, so recurrent monthly contributions to retirement accounts is the way to go (and what OP here is advocating).
No. You invest the same amount of money at a regular cadence throughout the year. The end result is that you obtain less shares when the price is high, and more shares when the price is low. It's explicitly not timing the market.
It's implicitly timing the market. If you have all the money available at the beginning of the year a better strategy is to just invest everything asap.
If you get the money monthly (e.g. from salary) then that's just normal investing and you don't have a choice anyway.
If you think that is some clever strategy then honestly you probably should get professional advice because you have some fundamental misunderstandings of the stock market.
I don't know hoe many times I've explained people the given strategy is not what researchers mean when they compare lump sum investing (LSI, a.k.a. converting all cash you have available for investing into equities) and dollar-cost averaging (DCA, a.k.a. splitting the available cash into equal parts and slowly converting the cash into equities at a regular pace.)
What that strategy is is just a regular (e.g. monthly) series of lump sum investments every time cash comes available (e.g. when salary comes in), that people tend to confuse with a DCA strategy.
Having said that: one LSI investment every month is a great strategy that historically does better than any DCA strategy.
Dollar cost averaging does not work and has never worked. Because most assets have unlimited upside and unlimited downside. A stock or asset can go ballistic for decades like Apple or Bitcoin, or it can fall to zero value.
There are no mathematical ways of winning investing. If it was that easy, everybody would do it. You can only follow your heart and do your due diligence.
> Because most assets have unlimited upside and unlimited downside. A stock or asset can go ballistic for decades like Apple or Bitcoin, or it can fall to zero value
Spot equities and crypto have limited downside. You put in x, most you can lose is x as you observed. Unlimited downside is not a thing outside certain exotic derivatives.
Even if zero is the bottom, an asset can have unlimited downside. It can go from $0.1 per share to $0.0001 per share and so on without end. Or, with the rational perspective, after 0 the downside does not matter anymore. An asset cannot go below zero, at least the assets I know of. An investment can go below zero and beyond, when you use leverage. But that's a derivative and not an asset, as you've pointed out.
What I mean is that dollar cost averaging is a myth and cargo culting in the world of investment. Let me explain:
Let's say you're "dollar cost averaging" by purchasing an asset during a few years, which fluctuates between $90 and $110. So after some time you have averaged around $100 per share. Now if the asset goes to $5000 next year, what has your dollar cost averaging accomplished? Or if it goes to $3, what has your dollar cost averaging accomplished. Nothing in both cases.
One of the hardest myths about investment, that seems to be impossible to beat out of people's heads even with a sledge hammer, is that there is a proper historical price for an asset and that prices only fluctuate around that price. So you buy when it's under that price and sell when it's over that price. Smart, right? No, it's dumb and the reason why most people trying to invest lose their money. An asset can go down and stay down on a new price level. Or it can go up and stay up on a new price level.
An asset has unlimited downside, in the same sense that you can't move anywhere. See, to move somewhere, you would first have to get halfway there, and to get halfway there, you first half to get a quarter of the way there, and so on, so therefore you can never move from where you are.
>> Even if zero is the bottom, an asset can have unlimited downside. It can go from $0.1 per share to $0.0001 per share and so on without end. Or, with the rational perspective, after 0 the downside does not matter anymore. An asset cannot go below zero, at least the assets I know of. An investment can go below zero and beyond, when you use leverage. But that's a derivative and not an asset, as you've pointed out.
This is drivel. Being able to tag on infinite 0s after the decimal doesn’t make an asset have unlimited downside, the limit is $0 as you yourself apparently know.
I didn't mean the upside/downside on your investment, but on the asset. Most investment assets except for bullion can fall to 0. They can also increase without an upper limit, like for example Apple stock. The market being "high" or "low" is not remedied by dollar cost averaging.
My investments have always had fantastic results, far above what any index fund could render. I have been forced to involuntary "dollar cost averaging" by having to wait for the next salary in order to invest more. But "dollar cost averaging" is not an investment strategy, it's confusion on the highest level.
Dear Internet Stranger (who is also an amazing investor): Have you considered starting you own hedge fund? If not, are you willing to share some of your best investments in the last few years?
You wouldn't be interested in an answer from an internet stranger. But please tell me how "dollar cost averaging" would help any investor in a real world scenario?
It actually grieves me that your average person is completely unwilling to just take a few days of their life to understand investing and what it is and how they can sensibly do it. Instead they decide to treat it like a casino and chase hocus-pocus like "dollar cost averaging" or "technical analysis" or "day trading".
Every person usually has some area of expertise or interest, or even a hunch. Take that and invest accordingly, long term. There are tools available to make any investment very conservative or very risky, according to taste.
