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tony

Big Change At Vanguard

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33 minutes ago, tony said:

I’m fighting a lost fight here, but this is one definition of literally per google:

used for emphasis or to express strong feeling while not being literally true.

🤷‍♂️

If DCA is investing regularly then I’m not sure what plain old regular investing would be.

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Ed, I think DCA means averaging the cost of shares bought via periodic purchases of a more-or-less equal amount.  It's DCA whether you are doling out a lump sum or whether you are investing a regular amount from a biweekly or monthly salary payment.  I don't believe that "regular investing" is a meaningful category: I guess the alternatives would be lump-sum buy and hold investing or some approach based on market timing and trading.   I also think the the question of averaging a lump sum vs just investing it all immediately is less straightforward than you make out; while it is true that statistically you are most likely to do better the longer you have the money invested in equities, there is also some risk reduction to be gained by the DCA approach.  Let's say that you got an inheritance. There is a small but statistically significant chance that after investing it all today, in the next few weeks the market dives 30% and it takes a long while for it to recover.  If one chose to DCA over a year or two, that person would give up a bit of expected return, but would also mitigate the risk of their inheritance being diminished by a dramatic bear market or crash; risk mitigation is worth something.  

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3 hours ago, whyme said:

Ed, I think DCA means averaging the cost of shares bought via periodic purchases of a more-or-less equal amount.  It's DCA whether you are doling out a lump sum or whether you are investing a regular amount from a biweekly or monthly salary payment. 

DCA isn’t a method of calculation, it’s an investment technique.

Words evolve and eventually mean whatever people use them to describe. In my view people are destroying the meaning of DCA just as they have the word “literally”.

In my view, Wikipedia has correctly defined DCA.

3 hours ago, whyme said:

I don't believe that "regular investing" is a meaningful category: I guess the alternatives would be lump-sum buy and hold investing or some approach based on market timing and trading.

In my view, we don’t need a special term to describe investing on a regular basis whenever you have surplus income. That is by default, plain old investing.

To withhold cash from the market for some future time out of fear the market will decline is called market timing. Within that subcategory there are lots of schemes of which DCA is just one.

We really don’t need a term to describe non-market timers just like we don’t really need a term to describe non-diabetics (although perhaps there is one).

3 hours ago, whyme said:

Let's say that you got an inheritance. There is a small but statistically significant chance that after investing it all today, in the next few weeks the market dives 30% and it takes a long while for it to recover.  If one chose to DCA over a year or two, that person would give up a bit of expected return, but would also mitigate the risk of their inheritance being diminished

That risk exists regardless of whether you have new money or existing money. Basing future actions on exactly how you got into a particular situation isn’t logical because you are where you are regardless of how you got there. To think otherwise brings us errors like the sunk cost fallacy.

If I spent the last 10 years slowly building up a million dollar portfolio then there is a chance that tomorrow the market will begin a huge decline.

If I inherited a windfall, spent the last six months DCAing, and now have a million invested there is an equal chance that tomorrow the market will begin a huge decline.

If I inherited a windfall today then there is an equal chance that tomorrow the market will begin a huge decline.

...in each scenario, I have to decide today (and every day) what percentage of my assets should be invested in the market. Each scenario is absolutely identical. People would correctly criticize me as a self-destructive market timer if I moved my portfolio into cash with the intention of spending 6 months DCAing and they’d simultaneously and incorrectly consider me a reasonable investor if I kept an inheritance in cash and slowly dripped it into the market over six months. If people plan to behave differently in functionally identical scenarios, it reflects a misunderstanding of reality on their part.

DCAing does provide risk mitigation, but using DCAing to mitigate risk isn’t reasonable. That’s what bonds are for and if the risk profile of your portfolio is too high for you to stomach 100% of your assets being invested then your asset allocation is inappropriate and you need more bonds.

You don’t need to keep arbitrary percentages of your portfolio uninvested for arbitrary periods of time. You don’t need a portfolio with an arbitrary asset allocation that changes at arbitrary times to arbitrary degrees. 

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On 11/20/2018 at 5:36 PM, tony said:

 

Ed

You know I love you and admire you and often agree with you  but  you were definitely born on a different cloud. :)

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In my uncomplicated Wisconsin farm-boy common sense, use DCA when you start investing in your tax-deferred retirement plan (401k, 403b or 457b plan including Roth 401k, 403(b) or 457b) because you have no choice when starting from zero assets. That's how those plans work. I never DCA an employer-sponsored tax-deferred plan into cash. There may be a reason to DCA into cash, but I never experienced a reason for doing that. For me, it complicates my plan. I need and require simplicity. 

Lump-sum when you a lucky enough to receive a windfall such as a sale of real estate, rebalancing your 6 or 7 figure portfolio and/or received an inheritance. In rebalancing my portfolio last October because my stock allocation rose to a trigger point 35% (supposed to be 30% stocks 70% bonds), I lumped sum about $30,000 from my Vanguard stock index ETF into my Vanguard Total Bond Market Index. I reduced my stock exposure and increased my bond exposure and my portfolio is now about 31% stock/ 69% bond. Few portfolios are perfect. 

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Hi, Ed.  While you are most likely correct that DCA was coined to refer specifically to a lump-sum investing strategy, I can't see how the ubiquitous application of the term to include periodic investments from earnings is "destroying the meaning" of DCA.  The concept of periodic investment purchases of (at least roughly) the same size holds true for both applications, and takes nothing away from the meaning for a lump-sum investor who considers that strategy.  (This contrasts strikingly with the mis-use of "literally," where the word is used to mean something flatly contradictory to its primary definition.)

You are correct that portfolio asset allocation is the proper source of risk mitigation.  Still, should someone with a life changing lump sum sleep easier by splitting up their investment buying across a short period of time in order to minimize their chance of a worst-case market timing event, even with the knowledge that immediately investing the full sum gets a better result about two thirds of the time, I don't think that's unreasonable.  It's a trade-off.

While we're fussing over definitions, I wonder whether it is really accurate to label DCA as "market timing."  Since there is no attempt to identify a top or bottom or optimal time to buy the market, it seems more of a mechanical strategy to minimize the effects of market fluctuation on one's purchase price, almost anti-timing.  (Of course, if someone is averaging in because they think the market is overpriced at this time, that would be market timing, so maybe timing depends on the belief system, not the averaging technique.)

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1 hour ago, whyme said:

I can't see how the ubiquitous application of the term to include periodic investments from earnings is "destroying the meaning" of DCA.

Option 1: Keep all of your available assets invested and add to your portfolio whenever you have surplus income. As a result, your portfolio always reflects your ideal asset allocation.

Option 2: Keep a significant portion of your portfolio in cash and slowly invest the cash over a fairly significant time period (a year?). Your portfolio will initially be far more conservative than your desired asset allocation until it gradually falls in line.

I’d argue option 1 isn’t employing a scheme, they’re just keeping a constant asset allocation. I’d argue option 2 is employing a risk mitigation scheme, which results in a drastically different and variable asset allocation for a period of time. In my mind these two approaches are sufficiently different that we can’t accurately say they’re both doing the same thing even if they both invest regularly.

Sure, they aren’t in 100% direct conflict. I suppose one would have to use leverage to short the market to be in direct conflict, but their philosophies are sufficiently different in my view.

1 hour ago, whyme said:

You are correct that portfolio asset allocation is the proper source of risk mitigation.  Still, I don't think that's unreasonable.  It's a trade-off

If somebody needs to employ an inferior and illogical investment scheme to handle a very rare event (windfall) and if that scheme has a limited duration (a year?)...then I suppose they aren’t committing the worst sin, which is why I’ve never argued strongly that somebody shouldn’t do it. My passionate argument is more reserved for a semantic pet peeve and illogical behavior.

However, I worry the need for the mental gymnastics stems from a portfolio that is too risky for them to handle.

1 hour ago, whyme said:

I wonder whether it is really accurate to label DCA as "market timing."

I use market timing to refer to any investment scheme that causes you to change your portfolio based on your perception of the market or your beliefs/fears/greed regarding the market’s fluctuations. Perhaps other people use a different definition.

There are certainly more harmful forms of market timing than DCA. At least DCA has a fixed time window and doesn’t encourage taking risky/concentrated positions.

4 hours ago, tony said:

you were definitely born on a different cloud. :)

I’ve felt the same way my whole life. 

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4 hours ago, EdLaFave said:

 

I’ve felt the same way my whole life. 

Not a bad thing-being born on a different cloud . I probably was too. I like your " I know I'm right attitude"  which you always try to back up with facts and opinions but always maintaining a polite demeanor. Truthfully I don't care about DCA anymore so maybe we can all move on from this.

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