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Comment by ASinclair | Hacker News Reader

> Dollar cost averaging works when you have a steady stream of income that you're contributing to your investments and you have a heavily diversified portfolio.

To be pedantic (this is Hacker News after all), that is not Dollar cost averaging. That's lump sum investing at a regular interval.

Dollar cost averaging assumes you start with a pot of money and you choose to invest fractions of that initial pot over time. This is opposed to lump sum investing in which you'd invest the full pot of money at the start.

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Wikipedia says otherwise:

https://en.m.wikipedia.org/wiki/Dollar_cost_averaging

What you are describing seems to be the Systematic Implementation Plan.

I stand corrected.

> Vanguard specifically discusses the confusion in their paper: "We refer to the gradual investment of a large sum as a systematic implementation plan or systematic investment plan. Industry practice is to refer to such strategies as dollar-cost averaging; however, this term is also commonly used to describe fixed-dollar investments made over time from current income as it becomes available. (A familiar example of this form of dollar-cost averaging is regular payroll deductions for investment in a workplace retirement plan.) By contrast, we are describing a situation in which a lump sum of cash is immediately available for investment."

> Dollar cost averaging assumes you start with a pot of money and you choose to invest fractions of that initial pot over time. This is opposed to lump sum investing in which you'd invest the full pot of money at the start.

How is this not the same as:

> Dollar cost averaging works when you have a steady stream of income that you're contributing to your investments and you have a heavily diversified portfolio.

My "pot of money" is my salary over the course of my career and my "investing fractions of that pot over time" is twice weekly contributions.

Whether I start with the whole pot or not is of no consequence.

> Whether I start with the whole pot or not is of no consequence.

Do you get paid your salary a whole year in advance? No.

Thus this distinction is important. As noted in the wikipedia article above the rationale for this has to do with "I have a big load of cash right now, do I just put all of it to work now or slowly over time?"

So, I can't do DCA by depositing money 26 times per year and instead can only deposit it once per year?

Let's say my career potential earnings are $1000.00US. Why can I not consider that my bucket of cash (even though I do not have it on my person all at once)?

By depositing 26 times per year, am I not putting my money to work "slowly over time"?

It seems like a distinction without a difference. The investing outcome is identical, so why does it matter that your job pays you out over the entire year.

The difference is the following:

Scenario 1 [S1]: I have $120,000 in cash.

Scenario 2 [S2]: I expect to make $120,000 in cash over 12 months, equally once a month

On Day 0...

S1 - I have two choices: put all $120k in the market ("lump sum") or DCA is over 12 months.

S2 - I have no choice but to DCA it.

If I choose to DCA in S1, then I could have made more money by lump summing (depending on market conditions). This is basic TVM.

This is unfortunately not how DCA was explained to me. If you had extra money during the dot-com boom, you were probably taught that investing $400 a month in a fixed set of commodities was dollar cost averaging.

It was almost ten years later that I encountered the notion of portfolio rebalancing specifically mentioned in the context of DCA. Luckily I already had a notion that this might be a good idea, but how you behave when you know something is good is a bit different from how you behave when you suspect it is. I was not being as disciplined about it as I should be.

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