Sorry to break it to you, but dollar cost averaging isn’t the ultimate investment strategy.
If you are looking to maximize your return on investment, look elsewhere.
Let's see why and how to improve it.
If you are looking to maximize your return on investment, look elsewhere.
Let's see why and how to improve it.
You all know what dollar cost averaging is. Pick an asset:
- Buy a fixed $ amount of that asset.
- Do that at regular time intervals.
Continue until you are tired of it.
- Buy a fixed $ amount of that asset.
- Do that at regular time intervals.
Continue until you are tired of it.
If you started dollar cost averaging the SP500 at $100 per week in 2012 you would now have:
- Deployed $50k.
- For a profit of $27k.
- Or a ROI of 54%.
- Deployed $50k.
- For a profit of $27k.
- Or a ROI of 54%.
If instead you had invested $13k in the SP500 in 2012 you would now have:
- Deployed $13k (duh).
- For a profit of $27k.
- Or a ROI of 211%.
- Deployed $13k (duh).
- For a profit of $27k.
- Or a ROI of 211%.
Which gives you the side by side comparison below.
Over this period a lump sum investment would have outperform the ROI of DCA by a factor of 4.
That’s big.
Over this period a lump sum investment would have outperform the ROI of DCA by a factor of 4.
That’s big.
Now the reason is simple. If you DCA long enough in an uptrend, the average price at which you have been buying will be moving up and up and up.
Since your ROI is based on that average price that means the longer you DCA in a bull market the worst performance you get.
Since your ROI is based on that average price that means the longer you DCA in a bull market the worst performance you get.
Of course if you don’t have enough capital to deploy a big lump sum, dollar cost averaging can still be put to good use.
Choose a fixed amount of cash you want to deploy on a position. DCA up to that amount. Then just let that investment grow by itself.
Choose a fixed amount of cash you want to deploy on a position. DCA up to that amount. Then just let that investment grow by itself.
Starting in 2012 if you had DCA $100 per week for 3 years you would have deployed $13k and letting it ride up to now you'd be up 144% for $19k in profit.
That's a much better ROI than vanilla DCA.
That's a much better ROI than vanilla DCA.
Now it isn't always about pure ROI.
Say you expect the SP500 to continue growing at a rate somewhere north of 6% annualized.
Then using DCA as a savings strategy with compounding effects totally makes sense.
You should always tailor your investment strategies to your goals.
Say you expect the SP500 to continue growing at a rate somewhere north of 6% annualized.
Then using DCA as a savings strategy with compounding effects totally makes sense.
You should always tailor your investment strategies to your goals.
This is just one aspect of DCA. There is much more to learn if you want to dig deeper.
Does it matter how often you do it? Is the day of the week you DCA on important?
For answers to these questions and more go checkout the article.
ecoinometrics.com
Does it matter how often you do it? Is the day of the week you DCA on important?
For answers to these questions and more go checkout the article.
ecoinometrics.com
If you want more analysis of investment strategies backed by data gives us a follow @ecoinometrics and go checkout the Ecoinometrics newsletter.
ecoinometrics.substack.com
ecoinometrics.substack.com
PS Here is another thread you don’t want to miss: why it is never too late to invest in the big trends…
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