It’s the same argument that the above paper is making, just in the opposite circumstances.
DCA says investing into a down market improves your returns, and the best way to systematically do so is to to just always be investing, which is accurate and a useful psychological argument besides.
I’m not speaking of trying to time investments. I’m speaking retrospectively—if you can invest at a time that is a local minimum in retrospect, that money will grow faster.
Also, I’m not a big believer in the EMH—it’s valid over a period of seconds and over a period of decades, but in between, psychological effects and the joys of market timing(i.e., knowing an investment is crap, but riding the bubble anyways) can swamp EMH easily.
I’m speaking retrospectively—if you can invest at a time that is a local minimum in retrospect, that money will grow faster.
It’s certainly true that a time machine can produce outstanding investment returns :-/ but I don’t see what does it have to do with DCA.
I’m not a big believer in the EMH
That’s perfectly fine, but if you don’t believe in EMH and believe that DCA improves your returns, then this necessarily means that you believe that markets are mean-reverting and in that case there are better than DCA ways to take advantage of it.
I’m coming at this from two angles at once, so my points are a touch scattered.
1) The basic math. This says that putting money in as you get it is the best way to invest, because the market goes up over time, and that dominates any gains from DCA or market timing. When investing a lump sum there’s a small reduction in risk from DCA, but not enough to make it worthwhile in general.
2) The fact that I advise middle-class people on how to invest, and that this advice needs to be built primarily on psychology and not math. DCA is a good strategy for increasing real-world investment returns for normal people, because it convinces them that a down market is not the end of the world, and in some cases it convinces them to save at all(which far too many don’t, whether out of fear or short-sighted spending goals). Also, normal people tend to invest a portion of their paycheques, and that is a payment stream that leads naturally to DCA, even if the ostensible benefits of DCA don’t materialize.
The basic math. This says that putting money in as you get it is the best way to invest
I am sorry, “the basic math” says no such thing. It’s your strong assumptions (“the markets always go up”) which say this, assumptions I don’t consider to be self-evident.
primarily on psychology and not math
It would be helpful to clearly distinguish what you believe is the true state of the world (“math”) and what you think not-quite-rational people need to be told in order to do what you want to make them do (“psychology”).
I do not assume that “the markets always go up”. I merely claim that historically, the market has generally gone up faster than cash over the long run. This was the whole point of the paper linked above that said lump-sum beats DCA, and the same is true when investing a steady stream of income—you will generally do better in the market, so to maximize EV, invest right away when you get the money.
The post above was an attempt to draw that distinction. Are there any points I wasn’t sufficiently clear about?
That is not true. You advise your clients to act a way which implies a specific forecast: that the “markets” will, in the future, outperform other assets, e.g. cash, over the relevant holding period.
Do note that the main author of that paper runs a hedge fund.
That’s apples and oranges, isn’t it? All you’re saying is that holding cash is less volatile in nominal terms :-)
That’s an entirely different claim from saying that DCA improves your returns (or your Sharpe ratio).
Noted.
It’s the same argument that the above paper is making, just in the opposite circumstances.
DCA says investing into a down market improves your returns, and the best way to systematically do so is to to just always be investing, which is accurate and a useful psychological argument besides.
This claim is not compatible with EMH.
I’m not speaking of trying to time investments. I’m speaking retrospectively—if you can invest at a time that is a local minimum in retrospect, that money will grow faster.
Also, I’m not a big believer in the EMH—it’s valid over a period of seconds and over a period of decades, but in between, psychological effects and the joys of market timing(i.e., knowing an investment is crap, but riding the bubble anyways) can swamp EMH easily.
It’s certainly true that a time machine can produce outstanding investment returns :-/ but I don’t see what does it have to do with DCA.
That’s perfectly fine, but if you don’t believe in EMH and believe that DCA improves your returns, then this necessarily means that you believe that markets are mean-reverting and in that case there are better than DCA ways to take advantage of it.
I’m coming at this from two angles at once, so my points are a touch scattered.
1) The basic math. This says that putting money in as you get it is the best way to invest, because the market goes up over time, and that dominates any gains from DCA or market timing. When investing a lump sum there’s a small reduction in risk from DCA, but not enough to make it worthwhile in general.
2) The fact that I advise middle-class people on how to invest, and that this advice needs to be built primarily on psychology and not math. DCA is a good strategy for increasing real-world investment returns for normal people, because it convinces them that a down market is not the end of the world, and in some cases it convinces them to save at all(which far too many don’t, whether out of fear or short-sighted spending goals). Also, normal people tend to invest a portion of their paycheques, and that is a payment stream that leads naturally to DCA, even if the ostensible benefits of DCA don’t materialize.
I am sorry, “the basic math” says no such thing. It’s your strong assumptions (“the markets always go up”) which say this, assumptions I don’t consider to be self-evident.
It would be helpful to clearly distinguish what you believe is the true state of the world (“math”) and what you think not-quite-rational people need to be told in order to do what you want to make them do (“psychology”).
I do not assume that “the markets always go up”. I merely claim that historically, the market has generally gone up faster than cash over the long run. This was the whole point of the paper linked above that said lump-sum beats DCA, and the same is true when investing a steady stream of income—you will generally do better in the market, so to maximize EV, invest right away when you get the money.
The post above was an attempt to draw that distinction. Are there any points I wasn’t sufficiently clear about?
That is not true. You advise your clients to act a way which implies a specific forecast: that the “markets” will, in the future, outperform other assets, e.g. cash, over the relevant holding period.
Quite right. Any financial advisor who does not do so is being grossly irresponsible.