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Comment by ericmay | Hacker News Reader

> Picking individual investments is mostly a sucker's game.

Kind of. What you have to remember is what game you’re playing. While financial firms can outspend and out-research you at an individual level, they can’t take the same risks you can or move as quickly as you can. If I decide I want to go all-in on some company I can just do that. Your friendly neighborhood hedge fund? Not so much.

Most people should buy index funds or similar, no change there, and even those who decide they want to pick stocks should mostly have a broad portfolio, but you can pick stocks if you want and you can be successful.

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I agree - most people should buy low cost index funds but that is not enough - they have to space it out as monthly contributions over many years.

If you put all your money in at thr wrong moment, like say the Nasdaq in 99 then you waited 13 years just to break even.

But if you bought monthly you would have done very well because you averaged into the market.

The alternative is if you really understand valuations, diversification, risk and market psychology, like I do, then you can consistently beat the market. Most people cannot and most people you pay fees to do it on your behalf won't.

You could consider buying berkshire hathaway instead of a stock market index.... assuming the lead investors don't die too soon.

You give this advice like it's a choice.

I invest monthly because I get paid monthly.

I invest lump sums when I get windfalls, like bonuses, likely because I haven't invested as much as I want because my repayment mortgage (saving me 2-3%/annum) eats all my monthly income.

I sell everything when I need to buy a property because I'm not rich enough to use my stocks as collateral.

Isn’t dollar cost averaging fundamentally valuing “timing the market” over “time in the market?”

I’d need to do a Monte Carlo to provide hard evidence but I’m fairly sure that lump sum investing is, on average, going to provide the greatest return. For people just starting out in investment, whose appetite for risk is high, that seems the way to go.

Edit: Leggio and Lien (2001):

> We find DCA [dollar-cost averaging] consistently remains an inferior investing strategy to Lump Sum investing using the risk-adjusted performance measures.

> The failure of DCA as an optimal investing strategy for all assets and portfolios considered is likely because DCA is a conservative investing strategy best suited for investors interested in a forced savings plan that avoids the consumption of earnings.

Thing is, I don't think any individual investor is going to experience "on average" stock market patterns, they are going to experience a particular random walk. I think averaging is "better" if you are risk averse and concerned about worst case scenarios.

If said investor is risk-averse, I'm not sure I would be recommending going all-in on broad market index funds either.

Generally speaking, we're here recommending approaches to young investors, whose timelines are long enough that risk shouldn't be meaningful. Based off that, the result that will produce the best return on average is not going to be DCA.

The word average is extremely misleading. What most people want is to avoid exceptionally bad outcomes, and e.g. maximize the P10 value of the portfolio in that Monte Carlo simulation.

Look no further than the Kelly Criterion to see an example of maximizing EV being worse than maximizing the median outcome.

As another example, if you have $1M and I offer you a game of chance where I flip a coin. Tails you win back 101% of your buy in. Heads I get to keep it all. The EV maximizing strategy is to put your full $1M stake. But if you follow that strategy (especially if you do so long term) is ruinous.

Apparently DCA has a positive behavioral impact on attitudes towards investing[0], but I would love to know if this is entirely irrational or not.

[0] https://www.acsu.buffalo.edu/~keechung/Lecture%20Notes%20and...

>The alternative is if you really understand valuations, diversification, risk and market psychology, like I do, then you can consistently beat the market. Most people cannot and most people you pay fees to do it on your behalf won't.

There is also a catch: Suppose someone reads this, thinks "I think I could be as good as it as this HN user" understanding valuations and market psychology and whatnot.

Maybe you can. I am not sure if I can. But one thing I learned while trying, studying some companies and trying to find out where I could have relevant domain insight and then somehow coming up with an estimate for correct stock price when to buy/sell is a hugely time consuming hobby which isn't super fun.

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