Lump - Sum Vs DCA ?

[Retribution]

Hi,

I have been thinking about Asset Allocation for a couple of personal funds and have been reading through the Money Mind threads.

I see a pattern of people asking over and over again which is better Lump Sum or DCA and getting confused based on the replies.

I thought of creating a separate thread, just to discuss this topic.

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1) Vanguard study on which is better - Lump Sum or DCA

Summary :The study says Lump Sum beats DCA

Related article : https://www.theglobeandmail.com/glo...t-averaging-the-nitty-gritty/article20707395/

 

[Retribution]

Summary : DCA to make it easier but Lump Sum leads to maximized returns.

https://blog.alliancebernstein.com/...ar-cost-averaging-the-cure-for-market-jitters

 

[nekoarc]

Specifically, the study says this:

For dollar-cost averaging, it was assumed the portfolio started out completely in cash and was gradually transferred into a diversified portfolio over 12 months. For the lump-sum investment, the money was invested in a diversified portfolio for the full 10 years.

When people here are recommend DCA, they mean putting a fixed portion of your money from your salary every time you get paid monthly.

The article argues that if you have a huge lump sum, then investing it immediately is better than breaking it into 12 parts.

Both seem logical, and are talking about completely different situations. If got my bonus or won the lottery, investing it as a lump sum would probably be the best choice 60%-ish of the time. DCA-ing a portion of my salary every month forces me to budget and invest instead of spending it, and possibly forget to invest it at all.

 

[alexchia01]

Hi,

I have been thinking about Asset Allocation for a couple of personal funds and have been reading through the Money Mind threads.

I see a pattern of people asking over and over again which is better Lump Sum or DCA and getting confused based on the replies.

I thought of creating a separate thread, just to discuss this topic.

----------------------------------------------------------------------

1) Vanguard study on which is better - Lump Sum or DCA

Summary :The study says Lump Sum beats DCA

Related article : https://www.theglobeandmail.com/glo...t-averaging-the-nitty-gritty/article20707395/

If you know how to invest, you'll build a portfolio buying strong fundamental counters at the lowest price possible. No good investor do DCA.

DCA is a technique used by insurance agents to encourage their clients to continuously put money into their investment policy so that the agents can get monthly commission. Their clients think they are investing wisely, but in actual fact, they are not.

 

[Retribution]

Exploring Dollar Cost Averaging Versus Other Strategies

http://investmentmoats.com/uncategorized/exploring-dollar-cost-averaging-versus-other-strategies/


Good Discussion between DCA & Lump Sum Investing.

 

[deepblueli]

Exploring Dollar Cost Averaging Versus Other Strategies

http://investmentmoats.com/uncategorized/exploring-dollar-cost-averaging-versus-other-strategies/


Good Discussion between DCA & Lump Sum Investing.

Great discussion and I agree with the post. I think DCA is not a good way to invest when you have large sum of money. If you are a strong believer that market has a cycle then put the lump sum in capital guaranteed product like FD, SSD and buy lump sum (probably split a few times rather than real one lump sum) when there is a financial crisis.

The outcome of the investment result is ultimately depending on when you want to liquidate or use the money. DCA doesn't really provide a good guarantee you won't end up losing money.

Another interesting discussion point is if you don't have lump sum and want to invest from your monthly saving. Shall you DCA every month or save your monthly saving in SSD / FD and invest as lump sum when financial crisis?

 

[JuniorLion]

It boils down to risk-reward returns. Statistically, this means a "larger variance" in risk and returns if you do lump sum.

DCA: lower risk and potential lower returns
Lump sum: higher risk but potential higher returns

For lump sum, it is about timing the market (if you believe yoy know how to).

 

[peterchan75]

Sometime timing is important. If invested in SPY (S&P500 ETF) in 2008, the gain is 1.9x(270/140) and in beginning 2009, the gain is 3.3x(270/80). Retail investors are like hitchhiker. Be selective on the vehicle to flag down and hope it will bring you to the nearest destination.

 

[Mecisteus]

1) Vanguard study on which is better - Lump Sum or DCA

Summary :The study says Lump Sum beats DCA

Related article : https://www.theglobeandmail.com/glo...t-averaging-the-nitty-gritty/article20707395/

The DCA in those studies above are referring to splitting a lump sum of money $X into $(X / 12) monthly investment.

For the S&P500, the worst return in any 20 year period was 6%. Meaning if you happen to lump-sum at the peak, 20 years later this money had grown 6% pa.

https://www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795

The thing is if you want to do a lump sum investment, at least have an idea of the fundamental of the underlying. Check their current and forward PE.

https://www.starcapital.de/en/research/stock-market-valuation/

You wouldn't want to lump sum into an overvalued Nikkei Index back in the 1989.

So for a world index like IWDA, I think it is quite safe to do a lump sum investment now if you have a very long time horizon.

 

[highsulphur]

So say you inherit 1m tmrw, most here will invest the 1m immediately at one shot?

 

[peterchan75]

So say you inherit 1m tmrw, most here will invest the 1m immediately at one shot?

As the saying goes... easy come, easy go. Unfortunately, investment skill does not come together with the windfall.
Start with capital preservation first.
http://www.newtraderu.com/2012/12/17/w-d-ganns-28-trading-rules/

 

[Shiny Things]

Hi,

I have been thinking about Asset Allocation for a couple of personal funds and have been reading through the Money Mind threads.

I see a pattern of people asking over and over again which is better Lump Sum or DCA and getting confused based on the replies.

So, on the math, all-at-once beats dollar-cost-averaging... if you have a lump sum to invest in the first place.

A lot of these arguments don't actually think about where people's investment money comes from. Most of the time, when you're investing, it's because you're taking a few dollars out of your paycheck, every week or two weeks or every month, and you're putting that money into whatever you invest in. And if you're getting money regularly, in small amounts, then you're going to be investing regularly, in small amounts—that is, you'll be dollar-cost-averaging.

If you have a lump sum, then you have a choice to make: buy it all in one hit, or average into your position. But if you're investing out of your paycheck, then there's not even a question: you're going to be dollar-cost-averaging.

And that's fine! Both of these are perfectly good, sensible ways to invest. Arguing about which is "better" is counterproductive, because most people won't even need to think about the decision; they'll just keep investing regularly from their paychecks.

 

[junlove]

DCA is just ... averaging. So bull market you average your returns, and of coz average out the volatility of ups and downs. in a bear market you average your losses, and thus... still lose out..

Imagine Point A in time, at market low, Point B in time, at market higher x2. Many waves of ups and downs along the way. Person 1 dumped 100k at Point A, at point B gets 200k. Person 2 dumped 5k twenty times along the way, then depends at which points of the ups and downs he dumped... but overall will still lose to Person 1, might get back only +- 150k.

If the converse happens, the one who did lump sum will cry more..

Problem is, no one compares apple to apple in real world, and it's not realistic to do so as mentioned by others here... thus the many misconception about DCA vs Lump sum...

 

[junlove]

also, from what i've seen, many DCA investors via third party (i.e. agents to help you..) were misled into thinking in a bear market just leave it inside your portfolio... and by the time recession recovers... you will be ok...

for lump sum investors, becoz during bear it's so painful... they cut loss. and when market recovering, they return... technically they will gain more than the DCA ones whom did not make any moves

assuming the same time frame.

 

[Mecisteus]

also, from what i've seen, many DCA investors via third party (i.e. agents to help you..) were misled into thinking in a bear market just leave it inside your portfolio... and by the time recession recovers... you will be ok...

for lump sum investors, becoz during bear it's so painful... they cut loss. and when market recovering, they return... technically they will gain more than the DCA ones whom did not make any moves

assuming the same time frame.

If you can see forward bear and bull market, you don't need to DCA.

Just lump sum along the bull market. Sell everything at the start of bear market.

 

[peterchan75]

If you can see forward bear and bull market, you don't need to DCA.

Just lump sum along the bull market. Sell everything at the start of bear market.

"If".... it's that simple !

 

[Retribution]

Hi Shiny Things and everyone else,

Thank you for your responses so far. Appreciate everyone taking time to response.

Some definitions :

Lum Sum - Large sum of money you got at an instance. E.g. A huge bonus, inheritance, gift, lottery etc.... and you invest it in ONE go.

DCA - Two definitions : 1) It can refer to taking that large sum and invest it in multiple parts. 2) Taking a portion of your monthly salary and investing in every month or combining a couple of months and investing it.

The purpose of this thread is to discuss If you got a Large Sum of Money at an instance from a Huge Bonus, inheritance etc... What would you do?

Do you invest it in One Go aka Lum Sum Investment or DCA that large sum by breaking it into multiple parts.


The responses so far seems to fit into the following :

1) DCA & Lum Sum results are both good so you can choose either

2) DCA is better because it helps when there is downturn and you get as the investor gets impacted emotionally by the impact it has on your portfolio. Also, it will lead to better results as it has saved you from investing a lum sum when the market drops.

3) Lum Sum is better based on the fact that the more time you are in the market the better the returns. The returns from Lum Sum is way better and DCA.

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Based on the research I have read so far , it seems Lum Sum and DCA has different purposes.

If you have a long time horizon , Lum Sum is always recommended because over the long time period, a Lum Sum portfolio will always edge out in returns compared to a DCA.

The reasons for this is : 1) You were in the market for a long time, and the benefits greatly from the dividends and capital appreciation from the large lum Sum. 2) There are far more up markets then down markets and the lum sum benefits from these and thus the higher returns.

If you DON'T have a long time horizon then Lum Sum is not for you. You should DCA it.

Do you'll agree with this?

Appreciate your expert views and comments.

Thank You.

So, on the math, all-at-once beats dollar-cost-averaging... if you have a lump sum to invest in the first place.

And that's fine! Both of these are perfectly good, sensible ways to invest. Arguing about which is "better" is counterproductive, because most people won't even need to think about the decision; they'll just keep investing regularly from their paychecks.

 

[TabascoSauce]

Not true that if u have no term horizon, lump sum will be better. It depends a lot on the price level u bought it. If u happen to catch the bottom then good for u. Unfortunately, most ppl are not that lucky nor have the ability to tell when is the bottom.

 

[junlove]

If you can see forward bear and bull market, you don't need to DCA.

Just lump sum along the bull market. Sell everything at the start of bear market.

“IF” is a decision point(s) for any investor. If u started a DCA plan with an agent. So you don’t expect a bull market but downturn? what?
I’m saying given a horizon of time point A (say now) and when u expect to liquidate or retire at point B. Lump or DCA, you decide. Overall bull, Lump wins more, overall bear, Lump lose more.

If you compare diff time horizon, might as well don’t compare.

 

[Retribution]

Actually, according to the different research by Vanguard, Kitches and couple of others, time horizon is a major factor in making Lump Sum give way better returns compared to DCA if you have a large sum to invest no matter the price level you entered in.

Not true that if u have no term horizon, lump sum will be better. It depends a lot on the price level u bought it. If u happen to catch the bottom then good for u. Unfortunately, most ppl are not that lucky nor have the ability to tell when is the bottom.