Does DCA strategy really work in long term?

[deepblueli]

Hi,

I have been thinking that if DCA (dollar cost averaging) is really better than most other investment strategy. Does it really give you a good return or even prevent loss for long term?
The biggest assumption is the market is always moving up in long term. But is it true?
STI hasn't hit the 2007 peak yet as of now, although US S&P 500 / Dow Jones has been all time high. What if there is a crash coming?

I think it still have the issue of timing market, i.e. it highly depending on when you start the DCA and when you liquidate it if you adopt DCA for your retirement.
It basically has the similar chance of a big-small game (although you don't lose all), whether you will ultimately make a profit or loss.

What do you think?

 

[BBCWatcher]

The biggest assumption is the market is always moving up in long term.

No, that's not an assumed requirement. Dollar cost averaging can still work quite well even when a market moves sideways for long periods, as long as the market has at least some volatility.

The "biggest" DCA assumption is long-term consistency, ideally over decades -- doggedness.

 

[deepblueli]

No, that's not an assumed requirement. Dollar cost averaging can still work quite well even when a market moves sideways for long periods, as long as the market has at least some volatility.

The "biggest" DCA assumption is long-term consistency, ideally over decades -- doggedness.

If market moves sideways (which rarely I think in terms of long term wise), then I think we don't really need DCA.

I am started to think if we use DCA for planning for retirement fund, we are actually inherit the same risk of buying the underlying stock, which may make a loss pretty much depending on when we need to cash out. It doesn't really help much in reducing the risk of timing the market.

 

[TabascoSauce]

If market moves sideways (which rarely I think in terms of long term wise), then I think we don't really need DCA.

I am started to think if we use DCA for planning for retirement fund, we are actually inherit the same risk of buying the underlying stock, which may make a loss pretty much depending on when we need to cash out. It doesn't really help much in reducing the risk of timing the market.

Dca have automatic mechanism to buy more when price is Low and less when price is high. So even in a side way environment it helps

And theoretically, the longer ur investment horizon, the lesser the risk.

 

[BBCWatcher]

If market moves sideways (which rarely I think in terms of long term wise), then I think we don't really need DCA.

I don’t understand what you mean.

 

[alexchia01]

Hi,

I have been thinking that if DCA (dollar cost averaging) is really better than most other investment strategy. Does it really give you a good return or even prevent loss for long term?
The biggest assumption is the market is always moving up in long term. But is it true?
STI hasn't hit the 2007 peak yet as of now, although US S&P 500 / Dow Jones has been all time high. What if there is a crash coming?

I think it still have the issue of timing market, i.e. it highly depending on when you start the DCA and when you liquidate it if you adopt DCA for your retirement.
It basically has the similar chance of a big-small game (although you don't lose all), whether you will ultimately make a profit or loss.

What do you think?

DCA works better than no investment strategy, but not better than most investment strategy.

The best return you get from Dollar Cost AVERAGING is AVERAGE. The name already tells you the result.

In the long-term, it does prevent you from losses, but return wise cannot beat a sound investment strategy.

Yes, market does move up in the long-term, but if you start DCA before a market crash, then you are going to take a long time to break-even. So, the issue here is timing, not mindlessly averaging up or down.

 

[BBCWatcher]

Don't get too excited or theoretical here.

If you're staring at your bank account statement, and if it has a number like $10,000,000 or more, then let's have a thoughtful salon on the merits of buying an investment via dollar cost averaging versus lump sum. That'll be an interesting conversation perhaps.

For everybody else (which is almost everybody), you might have $100, $50, $250, $1,000... you might have some modest amount of extra money that you can save each month, after you've taken care of paying down high cost debt, mustering an emergency reserve fund, and adequately insuring. So just save regularly, doggedly, if at all possible. You're automatically going to be dollar cost averaging if you do that, and it works.

 

[Zahlen]

So... for small time small volume investors like the average joe out there, DCA is good enough and other strategies is only marginally better (or might even do worse) due to the small amount of money involved?

 

[Dividends Warrior]

DCA requires time, lots & lots of time to deliver the compounding effect. It takes decades, basically your entire working life. So naturally, you need to start young. No point doing DCA when you are already in your 70s or 80s because you no longer have the luxury of time on your side.

Besides time, another important factor is the type of investments you choose to DCA in. Imagine doing DCA for Kodak!

I would say DCA is suitable for young working adults in their 20s or 30s with only small available funds for investing.

 

[Mecisteus]

I am started to think if we use DCA for planning for retirement fund, we are actually inherit the same risk of buying the underlying stock, which may make a loss pretty much depending on when we need to cash out. It doesn't really help much in reducing the risk of timing the market.

This is a common misunderstanding.

You invest regularly through DCA for your retirement fund.

When you retire, you probably need to withdraw a small $X amount to fund your monthly expenses. In other words, when you retire you do a reverse DCA to eliminate the risk of selling at the bottom.

 

[Perisher]

DCA even at the peak will work out in the end unless you lump sum in at the peak.
Imagine you have monthly 1k to invest, yearly 10k.

If you put in 10k at the peak, next year crash, it's only 10k crashing to 5k while you continue DCA that year. So 20k averages, then 30k averages while it's at the bottom, then 40k, 50k... by year 5 should have substantial earnings. Assuming, it returns to near the peak within that 5 years.

Now, if you think about decades, that will work out just fine. Thing is, will the market go higher or will it be like SG recently and Japan's lost decade. Pick wisely.
Of course if you can time it well, the returns will be much greater but how many average joe can do that?

 

[BBCWatcher]

Japan is a excellent argument in favor of dollar cost averaging. The Nikkei index hit its all-time high on December 29, 1989. Since then, it has never really come even close to returning to that level.

If you had jumped into the Japanese stock market on or about that date, taking your big windfall and investing it in a lump sum, you'd still be underwater almost 30 years later. If you had dollar cost averaged that windfall, even over the course of a relatively short window -- over 2 years, for example -- you would have done much better.

Dollar cost averaging does a rather good job of mitigating downside risk.

You can dollar cost average at any age. You can dollar cost average into AAA rated government bonds, for example. And it's not only an investment strategy. For example, if you own some hotels, you can dollar cost average your purchases of toilet paper.

 

[kehyi4]

... but how many average joe can do that?

The funny thing about Average Joes is that the Average Joe doesn't think he is average

https://en.wikipedia.org/wiki/Illusory_superiority

 

[limster]

DCA answers the question "WHEN" to buy. It doesn't answer the question "WHAT" to buy.

WHEN= DCA
WHAT = Asset Allocation

Another issue that arises with DCA is the reinvestment of dividends, for example, if you are holding a lot of STI STF you will have a huge amount of dividends twice a year. Do you reinvest immediately, or spread them out as part of "DCA"? Myself, I find that I don't reinvest immediately.

 

[doody_]

DCA is the average strategy for the average dude to earn average returns.

My annualized return for the past 2 years is 8%. That's not too bad and I put in 10 mins of effort monthly.

 

[hindsight]

Hi,

I have been thinking that if DCA (dollar cost averaging) is really better than most other investment strategy. Does it really give you a good return or even prevent loss for long term?
The biggest assumption is the market is always moving up in long term. But is it true?
STI hasn't hit the 2007 peak yet as of now, although US S&P 500 / Dow Jones has been all time high. What if there is a crash coming?

I think it still have the issue of timing market, i.e. it highly depending on when you start the DCA and when you liquidate it if you adopt DCA for your retirement.
It basically has the similar chance of a big-small game (although you don't lose all), whether you will ultimately make a profit or loss.

What do you think?

The entire point of DCA is that you don't time the market, you invest incrementally into the market and your cost of the investment gets averaged out over the long run. It doesn't matter if the crash comes tomorrow if you are DCA'ing into the market over 30 years, you will be buying far more at post crash prices (low prices) and that will drastically lower your cost over the long run.

Of course this only works if you are investing in a diversified stock index etf, down averaging into ONE stock doesn't work because companies, even great ones, can fail over the long run. Compare the current index constituents of the S&P500 vs the ones 100 years ago and you will see that most of the current index heavy weights didn't even exist 50 years ago, the same thing will happen 50-100 years from now, companies will go into terminal decline at some point and be replaced but stock indices will always move higher as more profitable businesses/companies replace them.

This article sums up why investors, even professional money managers, have such a hard time beating a stock index like the S&P500.

 

[BBCWatcher]

My annualized return for the past 2 years is 8%. That's not too bad and I put in 10 mins of effort monthly.

For reference, simple dollar cost averaging into IWDA or VWRL over that period should have yielded something greater than 8% annualized. (Stocks, particularly U.S. stocks, have been doing quite well.) Did you do something different? Which is fine, but I'm just curious.

 

[TabascoSauce]

DCA works better than no investment strategy, but not better than most investment strategy.

The best return you get from Dollar Cost AVERAGING is AVERAGE. The name already tells you the result.

In the long-term, it does prevent you from losses, but return wise cannot beat a sound investment strategy.

Yes, market does move up in the long-term, but if you start DCA before a market crash, then you are going to take a long time to break-even. So, the issue here is timing, not mindlessly averaging up or down.

I don't think u understand the purpose of dca very well. The purpose of dca is driven by the motivation that timing the market is a difficult task for most investors. In fact most professional investors are not good at it. The dca approach relieves investors the burden of timing the market and does a relatively decent job given various built in mechanisms.

Ur last para highlights an issue that is a problem for any strategy if u enter the market at the wrong peak. The dca approach mitigate this problem by buying less at peak and more and trough.

 

[alexchia01]

I don't think u understand the purpose of dca very well. The purpose of dca is driven by the motivation that timing the market is a difficult task for most investors. In fact most professional investors are not good at it. The dca approach relieves investors the burden of timing the market and does a relatively decent job given various built in mechanisms.

Ur last para highlights an issue that is a problem for any strategy if u enter the market at the wrong peak. The dca approach mitigate this problem by buying less at peak and more and trough.

I've been investing for over 20 years. I know exactly what DCA is all about.

It's you that don't understand DCA.

Professional investors have NO problem timing the market. It's the amateur investors that have this problem.

Insurance agents take advantage of this fact and promote DCA as a way of investment to their newbie investor clients, which in reality, this type of investing benefit the insurance agent more than their clients.

DCA was never a professional investor way of investing.

 

[deepblueli]

My thought is that DCA provides not much guarantee than other strategy than you will make profit at the end. So, even for average person, the risk is still more or less equal to investing on the underlying asset that you DCA on.

It will achieve a long term average price but it would mean in long term wise, when you need to liquidate it, you have ~50% chance that you will sell above your average price I think.

It still very much depends on which market condition it is when you need to withdraw money from your investment.

Only if market is always in upward position in long term, then you will make a return higher than safer option like bond, etc.

Does market always in upward position or sideways in long term?