1st: this entire post is from the perspective that you have the capital available to you on Day 1, and that it’s sitting in cash. It is not from the perspective of you’re earning the cash over time (ex:. 401k contributions over your lifetime)
Before everyone, loses it on me immediately, I actually think the psychological gains from DCA are actually worth the average loss you’d take. But it doesn’t change the fact that DCA as a methodology compared to strategy of dumping all your intended investment into an asset from Day 1 is inherently break-even (at best) or a net-loss (at-worst) - ON AVERAGE.
If you start from the assumption that the stock market tends to rise over time, waiting to put money into a stock pick is costing you money. Sometimes you’ll “win” and the stock will go down over that interval. Other times you’ll “lose” and the price will go up over that interval. But over many stock picks and repeat trials, on-average DCA loses more than it wins (simply due to the first sentence of this paragraph).
Now, psychologically, DCA really helps. I can attest from personal experience. Here are the basic scenarios you have:
- Scenario #1: DCA & stock goes up during period you’re buying:
- Psychology: You feel like you made a good pick. You’re happy. You’re not overly concerned w/ the gains you missed if you’d invested all the capital at Day 1 because you’re happy with your skill picking out a good stock
- Scenario #2: DCA & stock goes down during the period you’re buying:
- Psychology: You’re a bit disappointed, but you’re also comforted that you didn’t load up on Day 1. Sometimes, you feel excited, even great, that you’re now getting an even better deal on this stock than your original buy price
- Scenario #3: All-in at Day 1 & stock goes up during what would've been DCA buying period:
- Psychology: You’re happy. Though not much more happy than if you’d done Scenario #1.
- Scenario #4: All-in at Day 1 & stock does down during what would’ve been DCA buying
- Psychology: You’re distraught. At best, upset with yourself that you mistimed your buy and left money on the table. At worst, considering panic selling.
As you can see, in both DCA scenarios you feel pretty good about yourself. You certainly aren’t kicking yourself too hard, and if you’re in a hole it feels like one you can still climb out of. Compare to the “All-in” scenarios, the pain of the loss aversion in scenario #4 outweighs the extra satisfaction you get in Scenario #3.
In summary / TLDR: if we were robots without emotion, and if you’re faced with the decision many times throughout your life (so you get the benefit on “on average”), you would not engage in DCA.
Submitted May 13, 2020 at 03:35PM by flapjackbandit00 https://ift.tt/2WrMKJ1
