Why Dollar Cost Averaging Beats Buying The Dip: Text & Video Presentation

Ted

FYI: Let’s say you had the ability of a god – you could determine the exact low point of the stock market each year], in real-time, and only put your cash in at that very moment. You might assume that this ability would guarantee you could outperform all other investors.

And you’d be wrong.

Now imagine the people who expect to only buy the dip in real life. They have no such ability to know when that lowest point will be and no way to be sure they’re to buying in at the best possible time.

Investors holding back from investing because they assume they can identify a better entry point sometime in the future cannot actually do this consistently over time. What is more likely is they’ll suffer opportunity cost and frustration.

In his post, Nick Maggiulli makes this point using the historical record and some incredible charts. Nick is the data analytics manager at Ritholtz Wealth and blogs at Of Dollars and Data.
Regards,
Ted
https://ritholtz.com/2019/02/why-dollar-cost-averaging-beats-buying-the-dip/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+TheBigPicture+(The+Big+Picture)

Old_Skeet

For investors that are in the accumulation phase of investing and have a good number of years before they move into the distribution phase of investing I think the dollar cost average strategy works well. For me, being in the distribution phase of investing, buying the dips adds a little spiff.

msf

This article is actually comparing two forms of lump sum investing: invest now, or invest when the market is next at a low point. (It just does this repeatedly and averages out results.) The low point is defined as the minimum point between two all time highs. Therein lies the problem.

If the market is on an upswing (much of the time), you're waiting until the next all time high (which by definition is higher than now), and then waiting for it to reach its next minimum (which is likely to be higher than now).

Tweaking the timing slightly and buying at a redefined "dip" should do better. As in the article, assume omniscience but buy at the lowest point between now and the next all time high. If the market is on a downswing toward that minimum, you'll win by waiting and buying at a lower price than now. If the market is rising toward that next all time high, you'll win by buying now and catching the wave. (That is, unless the market really swoons after that high and winds up lower than it is "now".)

But that's if you're omniscient. I for one am not. I don't know when the market is at an all time high (when to raise cash) and when it will hit its next low (to buy) before going to its next high.

At best, I might smooth returns a bit by trying to sell when the market is up (but not at a high, which I can't know psychically), and trying to sell near a bottom (but not at the actual bottom). I'll miss some losses this way but also miss some gains, thus smoothing results (with possible tax consequences), but likely not helping returns.

VintageFreak

I am calling BS on this one. I have told this story before

Northern Technology Fund. $5000 to invest. Instead of investing the $5000, I thought I will first "study" how to invest. I learnt I should not "lose" the opportunity" and I "should also cost average". So I invest $2500 - the fund minimum - and then $250 a month for next 10 months.

After the dot com bust hit My total investment was under water. If I had invested the $5000 at the beginning I would have been positive. I would have held the fund instead of selling.

DCA is like everything else. Wait for the right time of the year/decade/whatever then do a "study" to say "a-ha i told you so".

My motto - when you go in, you go in quick. IF you go in after dip you went in at lower price. Math. The only good 4-letter word.

Derf

@VF: You do have a point. I'm not underwater with Peaks (Micro Cap) ,but would be further ahead if I doubled my initial investment than DCA.
Derf