After a bunch of philosophical posts in a row, today’s post is more concrete: we’re talking investment strategy. But we also wouldn’t be us if we didn’t talk about the feelings wrapped up in all of it! All the usual caveats apply: we’re not financial advisors, none of this should be considered investment advice or legal counsel, your mileage may vary, etc. — you know the drill. ;-)
At tax refund time, just as at year-end bonus time, a lot of us are thinking about what to do with that chunk of cash we’re receiving. (Ahem — not us this year. We owe and are still dreading the day it comes out of our “life happens” fund.) In the past, we would have dropped that refund into a savings account we used for dollar cost averaging (DCA), and let it slowly get invested, twice every month, into our Vanguard index fund accounts, or going back further, into our USAA mutual funds.
Dollar Cost Averaging
For a long time, we were big fans of dollar cost averaging, the notion that you hedge against market losses by not buying a whole bunch of shares at one time, but rather in smaller increments over time. The idea is that you buy more shares when the price is low, and fewer shares when the price is higher, which intuitively makes sense as a good thing, so you don’t load up on expensive shares. And note that we’re not talking about making automated investments each month as paychecks roll in — that’s a very good thing. We’re talking about the real dollar cost averaging, which is assuming you have a chunk of cash available to use, but rather than investing it all at once, you break it into smaller investment amounts over time.
For naturally risk-averse people (me me me me me!!!), this is an incredibly appealing concept. Dollar cost averaging addresses the fear that the market will crash right after you invest your big chunk of money, eroding your value overnight. Instead, it gives you limited exposure to any given share price, which seems smart, right? There’s only one problem:
Mathematically, it turns out dollar cost averaging is not that great a strategy after all.
Vanguard did a now-famous study in 2012 that showed that, over time, dollar cost averaging leads to smaller investment gains than investing windfalls in single lump sums about two-thirds of the time. Why? Mainly one reason: While you may give yourself a hedge against precipitous market losses, you also lose the upside benefit of having time for that money to grow in the markets. As Vanguard puts it: you’re losing out on market exposure for some period of time with much of your money, which means you’re passing up potential gains in the interest of protecting against losses.
Essentially, dollar cost averaging is a fear-based investing strategy, focusing more on the fear of losses than the hope for gains. It’s not a great place for your head to be if you’re planning to be an investor over the long term, which is what you need to be if you want to succeed in the markets.
Changing Our Mindsets Around Risk
Before I could really embrace the notion of early retirement, in which we’ll live primarily off of our investments, I had to get comfortable with the idea of investing in the first place. On its face, it seems so risky. No FDIC guarantee and recent evidence that stocks can lose a lot of value overnight (hello 2008). You can totally laugh at me, but before I got my head right about this stuff, most of my “investments” were in things like intermediate-term bond funds, netting impressive amounts like 3 percent a year. I know, I know — you totally want my investment advice circa 2006.
I’m sure Mr. ONL must have wanted to bang his head against in the wall plenty of times trying to have this conversation with me in our early days:
Mr ONL: We need to invest our money so it will grow.
Me: But I’m afraid of losing value. I’d rather put our money somewhere safe.
Mr ONL: But “safe” investments actually mean we’re just losing spending power to inflation. We need to invest in funds that at least have a chance of outpacing inflation.
Me: Um, how about get me a blankie instead?
Sort of like the great FDR quote, “The only thing we have to fear is fear itself,” I sort of felt like anything we could do was too risky simply because risk exists. But what I failed to see was that literally any choice entails risk. It isn’t really a clear-cut choice between safe investments and risky ones (though there are certainly plenty of risky ones).
In truth, any savings account or investment option that felt safe to me came with a different kind of risk: inflationary risk. In other words, the risk that your spending power will decrease because the funds won’t gain enough value to keep pace with inflation. And frankly, with the sub-1% rates most savings accounts pay these days, that inflationary risk is more like an inflationary guarantee.
Related: Getting Comfortable with Risk
Coming to terms with inflationary risk changed everything for me, and made me accept that I needed to invest like a grown-up if I wanted to reach big goals. The notion that there was risk everywhere, and not this black-and-white world of “safe” versus “risky,” was actually very freeing. Because instead of being scared of investments where we could lose value, I could now evaluate upside and downside risk alongside the same metrics for other possible investments. And I really started to see that holding a lot of cash in low-interest savings account was actually pretty risky, too. I did not want a guarantee that we were losing spending power every single month — I wanted the chance for our assets to grow, not the guarantee that they would shrink.
Applying the Same Thinking to Dollar Cost Averaging
Dollar cost averaging is kind of like investing with a security blanket. It feels comfortable and safe, but it was actually holding us back from seeing all the gains that we could see, and which would supercharge our retirement savings. Because, as we’ve seen, even tiny differences in gain percentages, over the long term, can make enormous differences in what our assets total.
We took that Vanguard study seriously when we learned about it, along with a similar one done by AllianceBernstein in 2014. Both helped us see that the perceived safety of dollar cost averaging was an illusion, and in most cases, we’d be losing potential gains that way. And on the topic of risk, as Vanguard puts it, dollar cost averaging is just punting that risk until later. Because there’s no escaping risk in this game, there’s just a question of when to face it, and whether you’re comfortable giving up gains in the meantime. For us, that begged the question: If the risk is always going to be there, why would we keep giving up possible gains?
A Marketing Tool to Get Risk-Averse People to Invest
Plenty of people will still tell you that dollar cost averaging is a smart investment strategy, even after the Vanguard study proved the math. Like this NASDAQ story from 2014. Or this WSJ story that acknowledges that dollar cost averaging results in decreased gains but still recommends it. Most of the people pushing dollar cost averaging are those who want more people to invest, preferably with their institution. So rather than break down the math for you, they give out the security blanket in hopes of luring more people in.
If you’re terrified of investing in stocks and bonds because you’re afraid of losing all of your money, then dollar cost averaging might be a good strategy for the short term, as you get comfortable with watching your share prices go up and down. It’s for sure nerve-wracking at first if you’re in the risk averse camp, and giving yourself an intro period of averaging in to smooth out the big peaks and valleys could make total sense. But once you’re used to that, it’s worth asking if that strategy still makes sense for you long term. Just like all financial advice, it’s important to take everything you read with a grain of salt, and ask yourself if the person giving the advice has anything to gain by you lsitening to them.
What We Do Now
Our big financial decision period is always the end of each year, when we’re deciding what to do with our year-end bonuses. We typically have a comparatively large windfall then, and have to decide how much to put against the mortgage, how much to invest and how much to spend on something frivolous, like new (used) skis. For years, we’d take whatever amount we allocated to investments, and rather than invest it all in a lump sum, we’d put it into a “high-interest” savings account, and set up automatic transfers twice per month from that account into our investment account, taking as much as a year to invest the prior year’s bonuses.
It felt safe. It felt comfortable. But then we learned: it probably also cost us money in the form of lost gains.
Now, when we get a windfall, we invest it all at once. And I’m not gonna lie: It is a tougher approach for that part of me that still hates risk. We socked a big chunk into our investments at the end of last year, and then watched as all of our accounts immediately went down in January and February of this year. Thankfully we’re now back up on all of that stuff, but it was a good lesson that I need to get used to a different kind of ride with our new lump sum investing (LSI) approach. Regardless, we’ve assessed the risk of this approach, and we’re comfortable with it, so we’re going to ride it out. And because we still invest a big chunk of our paychecks every single month, regardless of what the market is doing, we’re also getting the benefit of the theory of dollar cost averaging, but without having to miss out on gains for money that’s just cooling its heels in the bank.
What Works for You?
Anybody else gone from being a dollar cost averaging investor to socking away lump sums instead, like we did? Or want to make a strong pitch for why dollar cost averaging is the best strategy for you? Any success stories of how dollar cost averaging got you comfortable with investing in the first place? We’d love to hear from everyone in the comments!
Don't miss a thing! Sign up for the eNewsletter.
Subscribe to get extra content 3 or 4 times a year, with tons of behind-the-scenes info that never appears on the blog.
Categories: we've learned
I’m still a fan of DCA. Yes, your return is generally lower, but it’s a tradeoff between inflationary and opportunity cost in exchange for decreased effect based on market volatility. I feel similarly, for instance, about bond allocations where your return is on average lower than a pure stock strategy, but you’re gaining in reduced portfolio volatility.
In general, humans are more emotionally invested when losing than not gaining (I think the ratio is 2:1, as in getting $200 is only worth potentially losing $100, but I don’t remember quite offhand). They’re both costs / losses, but psychologically it is a lot more threatening to say “You lost X principle” vs. “You did not receive Y gains.”
For sure the loss psychology stuff is legit! And you have to find your own investing strategy that feels right to you — if DCA is it, then awesome! The thing that has been most powerful to me in our finances is just recognizing that every single possible decision, even if made by not deciding, comes with its own form of risk. There are no situations where it’s no-risk vs. risk. It’s always weighing one set of risks against another!
We are definitely just like you guys – if we get a windfall, we invest that beautiful green all at once rather than buying stocks bit by bit over a period of time. That whole notion never really made a lot of sense to me either. I’d rather have my money in the market for a longer period of time, whereby maximizing my potential for gains.
And that is exactly where RISK enters the picture. The phrase “No risk, no reward” is particularly appropriate in this case. Go through life without ever taking a risk and you *probably* won’t have much to look back on. The truth is the majority of our major successes in life manifest themselves from at least some form of risk. Even moving to another state to take that dream job…is a risk. You’re leaving friends and family. Your support group. But you know what? A risk that is appropriately managed is a risk well taken – at least in my view.
Then again, I’m much more of a risk taker than, say, my wife – or you, Mrs. ONL. I follow in the footsteps of my dad who spent 20 years in the Navy, which instilled within him the confidence to put himself out there and do the things that may not feel comfortable, but are very much in your best interest.
Another really awesome topic, and we are right there with ya.
I’m totally with you on risk — and I think recognizing that fact, that *everything* is some sort of risk, was transformational for me. The easiest thing in the world to do — sitting on your butt and doing nothing — is a HUGE risk: a risk that you’re squandering your life. So I think it’s important to recognize that non-decisions or path-of-least-resistance decisions are still decisions too, and come with their own risks, just the less obvious ones. And yeah, I am not naturally a risk taker like you are — and I’m not recommending making inherently risky investments! But redefining risk for myself has made me a ton more comfortable with investing generally!
I had to comment here because your mention of taking a risk and moving to another state is center stage for a couple posts I have scheduled to come out this week. Exceptionally articulated comment, sir!
Look forward to your posts!
I’m a lump sum-er (ooo summer, that’s sounds nice. It was 30F yesterday). Hubs is DCA for now. He started an IRA 2 years ago and we did 2 lump sums, filling it up each time. The market, being the kind giver that it is, was flat or down for his entire investment period. He’s still a newbie investor and toward the end of last year, he started regretting his investments and wishing it was in a savings account. To fight back against that, I switched him to DCA every week. If we lose a little bit due to DCA, I’m okay with that so long as he’s still investing. Him getting spooked and getting out of the market is a way bigger loss.
Oooh, lump summer. Sounds very profitable (or maybe cancerous)… moving on. :-) Bummer that your husband had that experience… that was like me watching a single stock investment we made early on tank (and still, a decade later, not recover) — I was definitely scarred by it. So for him, DCA makes total sense. I’ll hold out hope that we’ll get over the market anxiety soon and you can lump sum everything. But if that’s what he needs to feel comfortable doing it, go with it!
Lump-sum all day! :) Every payday (26 a year) I looks at my expense needs for then next month or two. What I don’t need is invested right away, and what I do need stays in checking. Even during bonus time, the same thing! I go by the mantra “time in the market is better than timing the market.” Get those dollars to work for me ASAP! No waiting for them on vacation in a checking or savings account.
Way to make good use of periodic automatic investments! That’s totally the secret of our success, too, though we don’t have your willpower, and we try to hide it from ourselves on the front end so we never even see it in our accounts, and don’t feel like it’s available to spend. And yeah, we’ve come around to your way on bonuses, too! Love your description of it: put your money to work instead of letting it go on vacation!
In 2007, I opened a few 5% CDs. Ah those were the days…
What really helped me here was only investing money that I have zero need for in the foreseeable future. I am not going to touch the money in my retirement accounts for over three decades, so I don’t care if they lose money in the short-term. After retirement investing, I was setting aside money in cash to buy a condo in the near-term and then I did that. Now I have cash to pay for the remainder of grad school and a large-ish cash buffer. But the money I don’t need for any of my short-term goals, I am comfortable investing. It took having much more money than I needed to get to this point though :) I’ve never actually dollar cost averaged – I’ve always lump sum invested!
I almost can’t even believe that there were 5% CDs in 2007… it seems so impossibly long ago! And great point — I think starting out only investing money you don’t need for a long time is a great way to get comfortable with the whole concept, and just to start accepting that the numbers are going to go up and down, and none of it matters as long as you don’t sell shares. It was kind of the same for me, but to a more ridiculous level: “Oh, that money is fine to invest, but I might need this other money in the next 20 years, so I should keep it as cash.” Oh, there there, young, foolish me. :-)
This is a good topic because there is a lot of misinformation out there. DCA has been the gold standard for so long that it is going to take a while for people to throw it out the window.
We definitely had a switch when I learned more about the Vanguard study last April. I had always understood DCA to be a strong investment strategy with large sums of money. And of course we buy with every paycheck into the retirement accounts. Our larger sums of money were not that big while we were also paying off loans and saving for home renovations, so for many years it was not important. Then last April I got serious about FI, and we had bonus+tax return+ several months of extra savings to invest. Big chunk of cash, no idea how to deal with it.
My husband is quite risk averse (have you ever met an actuary who wasn’t?), so it took some convincing and he still ended up putting the cash in over 2 months. But I was able to move him away from the slow trickle plan, which would have taken a year of investing like you guys used to do. And this year we were all in, so progress made!
I’m impressed that he ONLY needed two months to feel comfortable investing last year’s money! I would have needed the full year. :-) Congrats on getting to full lump sum this year — that deserves a major high five regardless of how it turns out financially, because it shows that you guys faced your financial fears and decided to dream big instead of focusing on the potential downside. :-)
I put all of my dividend stocks on automatic reinvestment, which results in a kind of dollar cost averaging. But it’s also capitalizing on the return of the initial investment to grow the stock, so I guess it’s a hybrid. The hubby saves all his dividends to make an investment of his choosing. Not sure who has outperformed who, but we are definitely more comfortable with each of us following our own inclinations with investments.
That kind of dollar cost averaging is the GOOD kind, because it’s investing money as you get it, so basically lots of little lump sums, as opposed to your husband’s bigger lump sums. But your larger point is a great one: It’s important to make sure both partners in a relationship are comfortable with the investing approach — even if that means maintaining some separate accounts to let you each do what you want! :-)
If I was given a choice, I’d do lump sum. However, I usually just DCA because I don’t get big chunks of money often. Only at bonus time, and this year I didn’t invest at all because I saved it for a down payment. Sigh.
You’re doing the GOOD kind of dollar cost averaging, which is investing money regularly, as you get it. No shame in that! It’s basically just mini lump sum investing. :-)
YAY Windfalls and investing them all at once! I love a good windfall and maxing out one (sometimes 2!) Roth IRAs in one fell swoop! (also, I love me some good research! You guys just GET me, don’t you!?)
I was thinking of you when writing this! I was like, “Maggie would do a bunch of charts and show examples, and here I’m just linking to other studies, like a LAZY person.” :-) But you know I can’t help but focus on the emotional stuff instead of the numbers. I’ll leave the numbers to the people with PhDs. And hooray for maxing out Roths in one fell swoop! (I have dreams of getting to contribute to IRAs again once we retire! We’re priced out right now — though I’m not complaining. It’s a nice problem to have!) Hope you guys have an awesome weekend!
Ha ha ha – I totally usually just link to those studies as well (or blatantly steal their graphs if I use any at all!). Happy weekend to you as well!
It’s only stealing if you don’t give credit. ;-)
While we’ve never used DCA, I had to struggle through similar questions about the risk of investing large sums. In the end I came to the same conclusions. I’m glad I went through that process, though, so I can help others with the same fears and questions. Lately we’ve been “front-loading”–trying to max out the IRAs and 401k earlier in the year instead of contributing evenly throughout the year, when possible, to give it a little more time to grow.
I’m also glad I went through the process! Like you, I know understand both sides, know the pros and cons, and can explain them to others (or to myself in a moment of self-doubt!). So awesome that you guys are able to front-load that stuff! We still keep ours pretty level, but admire those who can max out early in the year!
Agree with your assessment 100%. DCA is supposed to be a strategy to not try to time the market. In reality, it is just a different market timing strategy. It may work to your benefit (if markets drop while you’re sitting out) or against you (if markets rise while you’re sitting out). Either way, you are 100% guaranteed to lose out on any dividends that would have been earned while invested, but are not while you’re sitting on the sidelines.
Well said. I didn’t even address the market timing issue in the post, but yeah, all the way. There’s so much dumb luck involved in investing, but the math clearly shows that luck tends to work a bit more in your favor if you invest in lump sums.
We do cost average by DRIPing but certainly do more of lump sum investing method. The Vanguard study is a very interesting one. I think the key with investing is not to time the market, rather, it’s how much time you’re in the market.
So, so true. Trying to time the market is the worst overall strategy, so anything you’re doing that’s automated is definitely a better strategy. Hope things are going well with the baby! :-)
Great post. You made me realize that I don’t actually DCA – it’s more accidental given my paycheck schedule, but whenever I have money to invest I put it in the market – as much money as possible. Thanks for opening my eyes to what I was actually doing :). Keep up the good work!
Glad we could help you realize that you’re doing it the best way! :-D Keep it up!
One caveat I will add, even though I am commenting three years later, is be careful about investing lump sums at the end of a calendar year. You may end up “buying the capital gain”. Capital gains are often paid out at the end of the year and it could result in some short term capital gains that will hit your taxes.
I am right there with you, toss it all in and let it grow. Even if your initial investment goes down a bit, it will most likely trend upwards in the future. You will also miss out on the benefits of Dividend payouts if you hold your money in a low interest savings account.
Good point about dividends! Yeah, you want to get in on those ASAP, so all the more case for just getting into the markets as soon as you can with each investment.
This is such a familiar story. Parts of it were actually discussed (and blogged) in the amber tree family early this year.
The point I also mentioned to my wife is the inflation riks. It the current situation in Belgium, it is not a risk, it is a guarantee to loose money.
Despite the fact that I know that DCA is in 66pct of the cases a loosing approach, I do save up money for a big lump sum investment. I think that is the player in me that wants to time the market rather than invest as the theory tells. Why? I do not know, I wish I knew… IT is about 25pct of our monthly investments.
I did some DCA with a lump sum at the end of 2014… I “lost money” on this one.
I guess it is also the current market volatility that makes me think I can buy at cheaper prices. As I do have accumulating assets (Dividends are internalised), I do not miss out on dividends.
I’m trying to remember who wrote about the idea recently of doing the “best” thing with 90% of your investable assets, and then living yourself 10% for “fun investing.” That way, you’re still doing frequent investments with most of your money and not trying to time the markets, but you can still play around with the other 10% if you need to do some risky day trading, or buying riskier instruments, or just trying to time the markets. I think as long as that’s a small slice of what you’re investing, then it’s fine to invest that player part of yourself. :-)
That is a principle I like and apply! I have my play money for fun. It looks I need more to suppress the last playneed I have!
I think as long as you can sleep at night, then your current approach is probably fine. :-)
After working 2 days in the garden, I will sleep good this night ;-)
I look at DCA as you’re still taking the same risk but with smaller amounts, so any investment in the stock market is going to entail the same risk whether you buy a big chunk at once or lots of little chunks. So, we’re in the invest it all at once camp. 😀
Like everything it’s all how emotionally connected to the process you are and go with what you’re comfortable with. Our investment strategies would probably give you an ulcer, and yours would make me want to pull my hair out, lol. As long as you’re ultimately comfortable with your strategy who cares what studies say is better or worse if it keeps you up at night? 😄
I think you’d be proud — I’ve gotten way more comfortable with investing generally, so we don’t do DCA anymore (not counting monthly contributions to 401s and Vanguard out of our paychecks), and we mostly buy stock funds. Probably the bond funds would still drive you crazy, but that’s also a tax strategy since we buy tax-free bonds to help keep our income low once we’re in Obamacare land. But I agree with you big picture: The best strategy is one that lets you sleep at night, and that you’ll stick with. So I’m a believer big time in DCA for beginners, but once you get past that initial fear, it’s worth assessing whether it’s still the best strategy. Hope you guys are having a great weekend!
I still don’t feel 100% comfortable in investing in shares but I feel that I progressed from last year. As I mentioned before, investing in shares is not cheap in Australia as we don’t have a lot of options, so I save money and (try to buy) quarterly to save in costs. I found that having an ‘investing fund’ lessens my fear of investing because I know it’s money I saved for the sole purpose of buying shares and I don’t need it for anything else. I guess how I invest now is how you guys invest your year end bonuses, I put everything in as soon as I get the money at the end of the quarter, whatever share prices are. My boyfriend is more fearful than I am, asking me from time to time “what the market crashes and you lose all your money?”. I always answer with “well, what if the market booms and I gain more?!”. I’m honestly still scared most of the time but I try to keep in mind that I’m in for the long run and red today doesn’t really mean anything but paper losses. That makes me feel better.
I hope you guys are well. Happy weekend! :)
I totally understand your fear — and I felt it especially when our invested numbers were very small, and I worried that a stiff breeze could wipe out all of our money. I definitely think it has gotten easier for me to handle as our balances have grown — I now see how impossible it would be to lose everything, and how the dips in value do tend to go back up eventually. So I would say stick with what you’re doing and trust that it gets better. :-) And your holding money for quarterly investing makes total sense given the high price of making purchases in Australia — I still don’t understand why everyone in the world doesn’t have access to something like Vanguard, with no buy/sell fees and the tiniest management fees possible. It’s pretty unfair. Hope you’ve had a wonderful weekend, and all is going well! xoxo
Firstly, I just need to share that I’m excited to get a post about DCA in my inbox on Saturday morning! I dumbed down in school and love that I can now be myself. I’m typing this as I ‘watch’ the kids swimming lessons.
Totally get the maths on leaving it in say a savings account you lose the potential upside of the investment.
We put all our after tax saving into our mortgage so haven’t had to face this personally. But the contributions to our superannuation (retirement) get paid each fortnight by our employers and get invested directly and so does the extra superannuation on my bonus which has just been paid, so I suppose that is not DCA but putting in (small) lump sums as soon as they are available. Very interesting thanks for the interesting read!
Glad you enjoyed the third post of the week. :-D And yeah, it does sound like you’ve been doing lump sum investing without realizing it! Lump sums don’t have to be big to count — it must means you invest the money (or pay off your mortgage with it) as soon as you get it, instead of sitting on it. :-)
I’ve learned a new term today: dollar-cost averaging. Now here’s a question: what is the term for the strategy where you figure, ok, I’m definitely going to transfer $200 to my Roth IRA this month, and then you try if possible to wait until a day in the month when everyone on Twitter is like, omg, the markets are crashing today, and then you transfer the money ASAP as soon as you get home? Because I may have done that a couple times. It’s a super scientific approach. ;)
I feel like I often comment on your posts late in the evening when my brain is a bit tired. Please forgive any occasional loopiness. (My goodness, is “loopiness” not a word? It autocorrects to “loonies”. Which I guess is a related concept).
LOL — You’re trying to time the markets! Haven’t you read from enough of us by now that that’s bad?? ;-) Haha. I think, since you’re new to investing, you’d be on very solid ground to do some dollar cost averaging, though the automatic monthly investments are pretty much the best way to get started — just don’t try to time the market! :-D
Hey! I am not trying to time the markets! I’m just…strategically monitoring Twitter and…deferring my transfers until the markets are slightly lower than…Ok, fine, I’m kind of trying to time the markets. ;)
(I’ve actually only done this once, back in January when there were some crazy low days. But I like to tell myself I’m 60 or 70 cents ahead of where I would have been if I’d contributed on a random day that month…maybe?)
Hahaha — I’m sure you’re like a good $2 up! So good job! Maybe you’re secretly an investing wunderkind???
I was for dollar cost averaging until I read jlcollinsnh The Simple Path to Wealth stock series where he had a post on dollar cost averaging: http://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
I even tried to get my part-time farmer husband to sell his grain using this strategy to no avail. (Selling grain is like trying to time the market and usually failing).
So now if I have a lump sum to invest we just invest it. And front loading our Roths is fun!
JL Collins is a wise dude. :-) And what an interesting analogy of farming to market timing. But if your husband feels we needs the hedge, I understand that. Unlike with markets, his grain can’t *later* gain a bunch of value, after he’s sold it. :-) So hedging in his situation makes sense to me. But great job shifting to lump sum investing! And congrats on front-loading your Roths!
“If the risk is always going to be there, why would we keep giving up possible gains?”
You nailed it with this point! The case for DCA is essentially an emotional one. If its going to take using DCA to get you into the market and making you stick to your plan, than go for it. Otherwise, lump-sum is probably the way to go.
I feel like I (and most investors) actually end up doing both anyway. When I occasionally get a chunk of money, its going in at once. Otherwise, its incremental investments based on monthly income.
It’s totally an emotional argument for DCA, and that isn’t inherently bad — some people need that security blanket to get comfortable with the markets. I know I did! And the automatic investments with income that comes in are the GOOD kind of DCA, so keep doing that in addition to socking away your lump sums! :-)
I have always done DCA for all my investments (I guess that’s how risk-averse I am). After reading your post, I have to admit that it completely changed my views about DCA. What you stated above not being able to money to grow is really a good one. Now, off to my wife and do some explaining.
No shame there — that’s what we did for a long time! And if that’s what it takes to get over your market anxiety, then hey, it’s better than NOT investing! :-)
I ink dollar cost averaging is a good strategy on a month to month basis, such as 401k contributions, IRA, etc, because most people don’t have the money to fill these accounts all at once. However, whenever I get a chunk of money, I invest all of it right away instead of slowly bleeding it in. I’ve come to grips that I might might lose money in the short term but my upside is stronger than my downsize with our time horizon. I’d rather make my money work right away!
Yeah, the monthly kind isn’t really DCA, it’s really periodic automatic investing, and that’s the GOOD kind. :-) So it’s good you do that! But yeah, socking away lump sums all at once is a great way to go!
What a great post! Glad you finally saw the light. We refer to investing which does not keep pace with inflation as “going broke safely!” It is amazing how many people don’t understand the concept. We also find ourselves looking at drops in the market as, “Ooh, it’s on SALE!!! It comes from knowing that the market WILL rebound, and is nearly always the best option. To quote Warren Buffet, “Be fearful when others are greedy, be greedy when others are fearful!” Great post!
Thanks, EV! Yeah, there was definitely too much going broke safely around here for years, but we’ve still had pretty good luck in most things. :-)
I’m a fan of dollar cost averaging simply for the fact that a lot of our systems are already setup for it – 401ks and autopays to our Roth IRAs. I think at the bare minimum, I’m happy with the fact that we invest regularly.
That being said, in recent years I’ve tried to max out our Roth IRAs as soon as possible. I maxed out my wife’s in February as soon as I got a job, and I’ll max out mine by the end of this month. I can then use the surplus money the rest of the year to increase our 401k payments as much as possible.
I’m hoping this strategy will significantly reduce our taxable income so I can take advantage of not working for two months and convert some of my Traditional IRA money to a Roth IRA and pay minimal taxes.
You’re talking about the good kind of regular investing, where you automatically invest from your paychecks. According to Vanguard, that’s “periodic automatic investing” (PAI) and not dollar cost averaging, which is when you get money, but then hold onto most of it and slowly invest that chunk. So I’d say you’re doing it right. :-) I think it’s awesome that you guys max out all of your retirement options as early in the year as possible, and in turn reduce your taxes. We’re about to have that huge tax payment deducted in a few days, and we’re not looking forward to it! :-)
I’ve been trying not to post many comments as I read my way through your archive – although I have a lot I’d like to say, the conversation happened years ago, so what’s the point?
But in case anyone else reads this post years later (like me), I wanted to add that the transition for us from dollar cost averaging to lump sum investing happened organically (years before the Vanguard study). We reached a point where we decided that growth of invested assets over time was the most powerful tool, so we decided to front load our 401k equivalent by increasing our monthly allotment. (Our allotment program would automatically stop withdrawing when the yearly maximum was reached, so we didn’t have to worry about overpayment.) An added benefit was that this point usually was reached in October, leaving us with more take-home pay in November and December for Christmas presents.
After we’d been doing this awhile, we decided the same logic made sense for our other investments, and we started lump sum investing any windfalls.