How to Invest New Cash: Dollar Cost Averaging vs. Lump Sum Investing
ฝัง
- เผยแพร่เมื่อ 6 ธ.ค. 2023
- Meet with PWL Capital: calendly.com/d/cpws-jyp-znp
If you're sitting on cash that you plan to invest you have a few options:
1. Invest a lump sum.
2. Dollar cost average.
3. Wait for a "good time" to invest.
The optimal choice may surprise you.
References: zbib.org/45b504dfd40d43bf833d...
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Watched it twice already (lump watch)
Probably better than watching it in 30 second increments with pauses in between.
I leveraged up and watched it on PC and Smartphone at the same time.
My wife hates that
I saved the video to disk, in case it gets longer or shorter in the future. Might watch it myself later or sell to someone who doesn’t want to watch a (potentially) longer new version.
@@somedudewithakeyboardbrilliant. I’ll stay on the sidelines and wait for video to be edited down, then I’ll watch the dip
I'm going to watch bits of this video spread across the next few months. I'm dollar cost averaging this video
I'm gonna lump sum it
love the increase in frequency with Ben's short videos... thanks Ben
I really liked the last point you made, not heard it mentioned before...
"If you're so worried about regretting the lump sum that you deem $ cost averaging necessary, it might be a sign to reconsider your asset allocation"
So many times people focus just on the numbers and ignore the behavioural part of investing.
On a side note all your podcast episodes on the behavioural sides of investing were great!
Thanks!
Just that there is no "behavioral part" in this video, no uncertainty no utility function, just averages
Yeah, it’s pretty typical for retail investors to overestimate their risk tolerance. It’s easy to think you can stomach big swings and even buy the dip, but until your portfolio drops 20% or a single position gets cut in half, it’s hard to *really* know how you’ll respond.
Except why would some one lump sum into voo at all time highs?
@@dreamlifedividends Why would you not?
this dude laughs at weird times and it’s a big part of the vibe 👌🏻
The best financial TH-cam channel for everyday people. Your advice has been a game changer for me and my family! Thank you!
Yeah it’s insane how good the info he gives us for free is.
Nice job man! Very balanced video. As a person who worked in the industry for 30 years,(now retired) I have found that fear and greed drive most of our investment decisions, and investment knowledge does little to inoculate that average investor from these two emotions. Dollar cost average addresses this very effectively at frankly very little cost over time. It's a subtle shift, but when one takes the longer point of view of wealth building over "investing," DCA makes a lot of sense. An investor can look back over a month or a quarter or a year and see incremental progress, though arguably maybe not the huge returns from well timed trades. I have met with thousands of investors, and it is almost always the basics we have to address, saving and spending habits, understanding the value of compounding... DCA addresses all of this.
Love these short consistent uploads
Hey Ben, love this short and sweet review of DCA, and as always, you bring receipts!
Hey Ben thanks for the regular uploads really appreciate it
Perfect timing for this reminder - I love your content! I have shared your videos with many of my friends - especially the renting vs buying ones were super helpful as they covered thing from both finance as well as happiness perspective! This channel deserves way more subscribers!
Love the content, glad to see more videos posted lately. Long live your money!
I never thought cost averaging could underperform lump sum investing, well after watching this I agree that we might be sacrificing returns by holding cash just for the mental satisfaction of safety.
Nothing wrong with that, economics is all about abstract notions of utility anyway
Lump sum investing provides the best returns. The problem however is nearly everyone is doing dollar cost averaging because you invest the money you saved each year or month. Only when you inherit money you can do lump sum investing or when you sell your company. Dollar cost averaging also increases the chances you'll be able to stay in the market during depressions and recessions.
Excellent points
This is one of those things I feel is fundamentally opposed to human intuition. How can it be that waiting out a storm is worse than letting run through your portfolio? These are the most important vids you make imo, the ones on risk and fancy alt assets are not surprising to me but these ones that go against what legitimately feels right matter most. Great stuff as usual.
Ben takes a solid approach to answering lot of deeming difficult scenarios.
you make so many people smarter with every new video. Thank you.
Thank you so much for making these videos, Ben! The level of financial education that you are providing is outstanding! Coming from Germany, I am in no position whatsoever to judge the level of public financial education in Canada, but I can only reassure you that I wish I would have had this knowledge 10 years prior! Thank you!
Thank you for explaining this jargon. I need to watch again and wrap my head around this terminology
This hits close to home. Thank you.
'If you have a lump sum to invest, it is likelhy optimal to invest it in a risk-appropriate portfolio as soon as possible." - well said, with the key descriptor being "risk-appropriate". Thanks for sharing, as always, insightful information.
This is exactly what I'm going through right now. Inheritance is in a mmf. I'm feeling a lot of FOMO as the market has melted up recently. I'm also still trying to figure out what to invest in. When I figure this out I was leaning towards lump sum. Slowly the picture is getting clearer. Thank you.
Ben you amazingly compress detailed analyses into a short digestible timeframe. …. myself, I recently played “buy the dip” with the Aug/Sept/Oct slide in the S&P and had some mixed results across two accounts. Probably shoulda bought and hold from July but sometimes I play the experiment just to know. Keep up the good work!
As always Ben, yet again valuable information. Came for the common sense investing data and discussion, received common sense investing data and discussion. 😊
Just found your channel and am pleasantly surprised. Thanks Ben, this video helped me a great deal!
Thanks for the rational reminder… I had some cash I was sitting on indecisively, and decided to bite the bullet and lump sum it into AVGE. Definitely came out ahead in this case.
Solid content Ben, thank you very much!.
Clear, succinct, and spoke to my - and likely others - current situation
Thank you ben , really insightful video
Great stuff, Ben.
Excellent video, clear and to the point.
Excellent Video Ben - Your analysis is bang on - Transaction costs especially in Canada can really ruin DCA - I thinks these counter intuitive topics are great as many people have this mantra re DCA.
Very useful reminder, thanks for sharing!
This was a fantastic video! Thank you!
Thanks for the analysis!
Go Ben! About to TCA (Time Cost Average) to binge your latest videos 🙂👍📊
Thanks Ben. Timely for me
Nice microphone!!! Also, great information 😊
I was just thinking this the other day and while it feels wrong the numbers don’t lie. Here goes!
Useful info/video. Thanks!
I lump sum watch all your videos Ben! Amazing content!
Heard Ben said the same thing at the bottom of covid crash, glad I went all in then 🎉
Thanks. This hit my question head on.
Thank you Ben. The mathematical advantage becomes compelling when there are numerous attempts, as probabilities play a significant role in your favor. However, if you have only one opportunity, the impact may not be as pronounced. Of course 90/10 could be, 60/40 probably not so much…
The thing is though, DCA is not protective in the worst outcomes for lump sums.
Amazing video as always
With great insights from Ben, no one would be ever left behind. That’s why I even subbed this page on FaceB00K
At this point I have to add tags to all the bookmarks of all your videos because you are on fire! I think pointing folks to a specific Ben Felix video has become my default answer to all the common questions I get all the time: Bro, why not invest in dividends - it's "passive" income? Lump sum or DCA? Why international? Should I buy X stock?
Ben Felix has the citations and expert short answers for all!
Great video @BenFelixCSI. You refer to a risk adjusted portfolio throughout the video and it raised an idea. It would be helpful to have a framework or model which describes what a good risk adjusted portfolio looks like i.e. during wealth accumulation and wealth preservation phases and risk/reward optimization. Thanks you!
Honestly this is great
Great perspective on this. Would be awesome to have your take on good pathways for invest lumpsum amounts outside registered accounts, as those have a contribution limit.
Thanks!! You answered my question :)
Obviously waiting for a dip when economic conditions are pretty okay is stupid. But when things are as bad as they are currently, it’s kinda crazy to recommend people to do a lump sum investing.
I know many are saying they love these more frequent uploads
Personally I prefer the old format. They felt more polished
Great video. It was a surprise for me. Especially today when we are probably on the edge of the hill and potential decline can be from 20 to 50%... but as we know the market could stay irrational much longer than...
I treat my investing the way I treat my work. I do a little bit on a regular basis, but if I have the time and energy, I'm willing to do a little extra. So for me, a monthly DCA is the baseline, but if I have some extra cash that I don't know what to do with, I'm more than happy to invest it as well.
Love this 👍
All in, always.
This is an important topic. I believe I've read (in one of Bernstein's booklets?) that while lump sum investment is optimal in terms of the mean, DCA is optimal in terms of the variance in the ultimate return.
One thing that must be discouraged is waiting for the "best time" to invest the amount. I've seen people frozen in place.
Agree on variance which makes sense since you're holding cash, but one of the observations I made in my analysis is that DCA does not consistently provide better outcomes in the worst lump sum outcomes.
@@BenFelixCSI Interesting.
DCA is provably *not* optimal in any scenario. If you want to mitigate risk, then you should reallocate to a more appropriate equity-bond ratio as Ben says in the video.
@@NeilGirdhar There is a difference between optimizing first and second moments.
Could you make an expected return / variance argument for DCA instead of lump sum?
I prefer to call the "invest every paycheque" a series of small lump sums, and not Dollar Cost Averaging, so as not to confuse things with having a bunch of money available, and putting it in slowly over time.
Thank you
I periodically come to Ben's channel to steel my confidence, redouble my resolve. They should study the behavioral effects of watching his channel on investing outcomes. :)
I totally agree with you. I invest my money whenever I got my paycheck, if I happened to get a lump sum (like bonus from my employer) I invested them right away. No need to wait for the dip as I am 100% sure I won't time it to perfection 😂
It's DCA if you say it but I call it lump sum ASAP lol😊
@benfelixCSI Really love your insights. Question about your model portfolio, do you update it, how often and do you make your updates public?
I still feel much more comfortable on DCA. I'd say that it feels good to pay a little bit for some mental comfort on reducing risk of regret even it may appear irrational.
Question; what about waiting for more tax advantaged account room to be available? (e.g., waiting a few months to add cash when new RRSP/FHSA room is added)
Have you seen studies that controlled for the extra fees and costs that come with DCA? Although a bit abstract, it would be interesting to see how much of the difference in performance can be attributed to fees instead of … something else.
As a few others said, I have never considered a lump sum investment other than just my regular monthly investments. The most I've ever had to drop at once was maybe a few thousand and I just did a lump sum for simplicity and it didnt feel like a lot of money. I would have thought like most people DCA would work out better.
The point is that there is a cost to uncertainty and lump-sum will give a higher uncertainty in the near-term. Not surprising that "on average" lump sum wins, thats what we all know by heart. It is really about the uncertainty and the utility function on top of it. If we are talking about life-chaning amounts and first time inverstors lump sum is not the right decision for 90% of them. Sure, if it is only 30% of your total assets and you're a seasoned inverstor, starts to make sense but if you have no experience and it is 100% the decision making should be different
Thanks Ben! Now please do a video on how I can get myself a lump sum 😂
Great video. For people who dollar cost average by necessity, is it better to save up and them invest lump sum at the end of every year or just dollar cost average every month?
Technically if you invest all you could, from say, your paycheck. That's Lump Sum. You're putting in all you can all at once. So just keep investing every pay check.
Thank you Ben, finally have the courage to lump sum my inheritance into 0DTEs
Danger.
Thank you ben for using the correct version of dollar cost averaging as opposed to investing a portion of your paycheck.
I want to point out that, in this context, dollar cost averaging is an ACTIVE investment strategy, as you are making a more specific assumption about the future of a particular security. Where the other, incorrect, version of dollar cost averaging, means you are making a PASSIVE assumption. I.E. that you can not know the specific future motions of a security, other than it will give you some return for some risk.
Its almost as if time in the market beats timing the market. But then again, having a lump sum of cash is a problem I wish I had lol. DCAing is my only option because that I'm sure is a better outcome than waiting to save a lump sum to then invest.
It’s a mixture of both, depending on cash availability
What ETFs does PWL capital use to access small cap, value, global companies? Like if you were going to add factor weighting in addition to VTI or VOO etc.
Adding a comment to see If i understood this right.
A previous video from Ben covered how market timing doesn't work, this at first glance might seen contradictory to the current video but it actualy isn't. "Market timing doesnt work" doesn't translate to don't chose lumpsum investment, it translates to dont wait to buy the dip.
Ben and if I'm not saving for the dip how am I supposed to accumulate the money to make the lump sum?
Dollar cost averaging might decrease your returns historically, but, mathematically speaking, it provides downside protection in exchange of upside potential. At every investing iteration, you are either reducing the average price at which you bought a security, or the price is above this average and you are at a profit. One thing that would be interesting to do would be to compare the performance of lump sum vs dollar cost averaging for the japanese market from the lost decade onwards.
Great video. Just wondering if you can do both. Can you invest a lump sum and then add smaller amounts after that on a regular basis?
You can do anything you like 😀. The trade-offs will remain similar. It is statistically optimal to invest a lump sum. If you don’t have a lump sum available, I would think about any future amounts that become available as new lump sums
What about the inverse? When withdrawing money from an invested portfolio to raise cash for a major purchase is it also better to do it all once at a “random” time or to split up the etf or stock sales over a period of time?
And when executing a sale, just hit sell at market price or use a limit order at say high end of range over past few days or weeks?
Could you share the figures you mentioned in the video? Thanks for all your videos!
When we use statistics, we always need to remember that story about the 6ft man that drowned in the river that was 3ft deep on average. They can tell us some information but not even close to the whole picture.
That's why I also cut the data up various ways. DCA has no redeeming qualities objectively. It is not protective from the worst outcomes for lump sum investments.
thanks
Curious if an analysis of DCA which is conducted over a few weeks rather than a full 12 months (as was done in the PWL capital source) would give us less conclusive results? 🤔
Thanks ❤
With great insights from Ben, no one would be ever left behind. That’s why I even subbed this page on FaceB00K
This is a good video and good topic. Definitely something to consider the research and think about. It seems part of the decision-making depends on an individual's particular situation. Let's say you don't have a high income and little savings. When you receive the lump sum, if you invest it all immediately, then an emergency happens and you need money, you're in a bad position. To deal with the emergency, you may have to sell the asset almost as quickly as you put the money in. That defeats the purpose altogether. However, if you put it into the market incrementally, you have money in the account remaining in case something does come up. But if your situation is different, you have high income and robust savings for emergencies, it may be better to do the lump sum. I can understand the research favors lump sum, but it needs to be seen in context of particular situations. It seems more like lump sum and DCA are actually more about different strategy tools for different people/situations.
I watche it once and took lots of notes so i can keep clipping parts of my notes to trade in for juicy interest payments.
Made a lump sum investment in VOO when this video dropped and now the markets popped off the Fed News. Thanks Ben
No one has a crystal ball.
I heard you say "on average" once or twice. I do believe you need to add those words to about two dozen other sentences. If you're trying to do the right thing "on average," this is great. Would love you to add commentary on "minimizing the probability of losing more than 40% of your principal" or something similar. Changing the shape of the tail risk is what most are trying to get it. Not choosing the best average outcome. Ps. Your stuff is awesome. Keep it up!
I looked at the lump sum left tail outcomes and found that DCA was only protective about 50% of the time.
If you are DCA'ing into stocks, you will have the risk of a 40% draw down anyway once you're fully invested. There is no way to fully escape that other than changing your asset allocation or overpaying for portfolio insurance.
Assuming I understand what he is saying I am surprised that lump sum out performs ACV, which is what I’m currently doing given my 50+ age group. I have to be somewhat cautious and agree with the behavioral aspect investing for me. I don’t know if I missed it, but he talks about lump sum being a better option for the appropriate portfolio. What is the appropriate portfolio for lump sum investing?
Does it make sense to save and lump sum if you are awaiting additional contributions room in registered accounts? Or should you just invest in an unregistered account and DCA into the registered accounts the following year.
Personally with how high interest rates are I use GICs and HYSAs or ETFs/Mutual Funds which are tied to HYSAs to park my money while I wait for it to go in a registered account. But I'd probably have a different answer if I didn't have a 6% HISA
What about Value Averaging Ben? Can't be compared?
I wish you would have covered value average investing
Could you also argue that dollar cost averaging makes relatively more sense with volatile investments (e.g., small cap value ETFs) compared to investments that tend to grow linearly over time (e.g., large cap growth ETFs)?
Is DCA in these samples investing equal amounts over the 10 year period?
I get that 65% is signifigantly better than 50% but I thought lump sum investing would have a better rating.
What about selling cash secured puts at the money?
While your house isn't an investment per se, a lot of people view it as such. The vast majority of people take out a loan(lump sum) to purchase it, yet pay a monthly mortgage(DCA) to own it some time in the future.
I’m more like “lump averaging”
So, both value averaging and lump-sum deployment outperform DCA. I suppose the question now is which of the former two reigns supreme, and to what degree.
Ben: Considering the average investor invest through their 401 or 403, then most investor will be DCAveraging and performing worst by default, correct?