Comment by kareemsabri | Hacker News Reader

Comment by kareemsabri | Hacker News Reader

DCA is always controversial here, someone always says lump sum is better, but I tend to think of the maxim of Ben Graham that "the stock market is a voting machine in the short term and a weighing machine in the long term". I expect prices to eventually converge to some "fair" or rational value for the stock(s) in question, but at any given moment they may be way off, particularly for a single name, so I like DCA as a way to mitigate that risk. I do however recognize that DCA is a psychological way for people to build comfort and a consistent investing habit, and for this reason I think it's extremely valuable.

That said, if you're very long it's hard to picture entering Google or Apple at 15-18x earnings and doing very poorly. Personally I am DCA'ing because i) it's how I invest and ii) I do think there is more pain to come. There are many reasons for that, rallies amongst meme stock names after dips is one indicator imo.

His analysis of Airbnb is interesting. Airbnb's trailing 12 month P/E ratio is 40x, not 15.5x. He is projecting forward Airbnb's recent monster quarter. This is a bit risky imo, though maybe he knows the business better than me. I'd still be more comfortable DCA'ing into Airbnb or travel as a sector, but 2 quarters ago their P/E was 150x, so at 40x it does look pretty attractive.

Shameless plug, since this is right in our wheelhouse, I am the creator of a DCA focused custom indexing investing product[1] and a simulator to backtest DCA investing[2].

[1] https://www.tryshare.app

[2] https://simulator.tryshare.app

> DCA is always controversial here, someone always says lump sum is better […]

That's because lump sum is better most of the time… if you already have a pile of money to invest:

* https://ofdollarsanddata.com/dollar-cost-averaging-vs-lump-s...

However, most of us don't have a pile of money just lying around, but rather we get a little money every two weeks or every month, in which case it's best to put away a little money every month:

* https://ofdollarsanddata.com/just-keep-buying/

Yeah, I addressed this in another comment[1]. "Most of the time" is doing a lot of work there, most is 75-80%. 20% is not negligible to me.

But as your article points it, DCA is not about getting the absolute best return, it's about risk mitigation.

> The only times when DCA beats LS is when the market crashes (i.e. 1974, 2000, 2008, etc.). This is true because DCA buys into a falling market, and, thus, gets a lower average price than a lump sum investment would.

If you are fearful of a crash (like now, as we are in the midst of war, recession, energy shortages, coming out of a pandemic etc.) risk mitigation may be higher on your list of priorities. I also think it just lowers cognitive load for people who aren't investing for a living.

All that said, I 100% agree with DCA as the best approach for people investing out of income!

[1] https://news.ycombinator.com/item?id=33786050

> "Most of the time" is doing a lot of work there, most is 75-80%. 20% is not negligible to me.

If I'm on game show, and I have to (e.g.) pick a door to win a prize, with one strategy winning 80% of the time, and another that wins 20% of the time, I know what I'm using.

And it's not like it's even close (51/49 or even 60/40). This is a substantial "most".

The nuance about DCA that is commonly missed is that lump sum gives a better return on average. The key word is average; averages hide much!

When people struggle to understand that I say DCA can be thought of as a sort of insurance. You pay a price to insure your home to protect against the unlikely event that your house burns down. But on average buying insurance will loose you money. But the cost is comparatively low, and for each individual likely worth it to protect from total loss, even if in aggregate it's clearly a loosing proposition.

DCA is similar, most people will end up with marginally lower returns, however a small percentage of individuals caught close to a rare negative market event will be less impacted by sudden large drops and experience overall much greater returns in the long run than if they had invested as a lump sum due to the nature of volatility decay.

Absolutely. Sure, in a bull market you give up some upside but I doubt you're likely to really care. If I'm riding something all the way up and making profit, I'm happy. If I'm losing 20% or 40% of my money, I'm extremely unhappy. Human sensitivity to negative emotion makes the insurance worth it, imo.

And yes, averages are great for everyone but the outliers!

Dollar Cost Averaging

thank you. Jeez people please don't drop some random acronyms and expect people to pick up themselves

note taken

Isn’t it so that statistically lump-sum is better[0] but that you take on overvaluation risk? If you DCA you reduce that risk.

[0] don’t have a ref but I think it has been shown that if you have a lump sum of money, historically you would have made the most gains by investing everything immediately (in the S&P500, there are only a few periods were this wasn’t true (therefore there is a risk)

Yes, you risk buying at inflated prices let's say. The common idiom is "time in the market beats timing the market", meaning yeah, just get your money in if you have it. Here's one analysis [1] that claims since 1950 in every 10-year period, lump-sum would have been better 75% of the time. But there are some caveats.

First, 25% of the time is a lot of the time. It may be possible to recognize an overheated market, by looking at historical earnings multiple averages for example. Second, they are using a "total market" index, even broader than the S&P 500. I don't know that many people who buy a total market index. Usually it's the S&P 500, or even a sector focus. The more specific you get, the more these results are likely to break down I would bet.

We focus on DCA for people who are working for a living and investing out of income, which is obviously a different cohort than Fred Wilson, the VC. So lump-sum investing doesn't really factor into it.

[1] https://www.northwesternmutual.com/life-and-money/is-dollar-...

it's about time in the markets, not timing the markets

However, whoever said the wise words about how Buy and Hold and been polluted by HODL was absolutely correct.

Stock indexes have a built in survivorship bias, as the failing or declining stocks eventually get diminished (especially if it is market cap weighted) or removed completely.

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