Timing The Market Vs Dollar Cost Averaging (Drip Feeding)
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- Опубліковано 2 чер 2024
- When markets are volatile and we have a sharp selloff people get nervous, especially if they have a lump sum to invest. The reason for this is that they are scared of a market crash and as a result, they try to time the market by holding back money thinking that there will be a better entry point at some time in the future.
One way around this is to drip-feed/dollar cost average into the market over a period of time. But this begs the question: what is the most effective period of time to drip feed over? In my latest video, I look at the answer to this question. I also explain in what kind of environments dollar-cost averaging performs better than lump-sum investing and whether it is worthwhile doing it at the moment.
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Very timely episode reassuring for those in the market
Thanks
Great video and analysis. May I ask over what investment horizon are these calculations presuming? 10yr? 20yr?
I imagine majority of people don't have large lump sums of money, that they can invest and leave for at least 10yrs or preferably more. So they have to dollar cost average, just like with their works pension schemes
Antonmursid✌🙏🙏🙏🙏🙏💞🙏
Incredible presentation and detail, thank you.
Thank you kindly @MrFrobbo
Love your data analysis/visualisation and the use of mathematical notations like the open/closed interval!
Glad you like them!
Great job. Thanks a lot 👍
No problem 👍
Wow, thanks for this video 👍🏻👍🏻👍🏻
My pleasure!
I love your videos and have always trusted the wisdom in them.
I had a small request - i see portfolio owners saying we should hold cash as part of our portfolio, however it really confuses me as to how and when that allocation is meant to happen. Is it a bit like portfolio balancing ? I would be. Erst ich grateful if you could make a video on how to do this as part of portfolio management 👍👍🙏
I have seen this lump sum vs drip feed argument before, but it assumes that the cash you are holding back for drip feeding over the year is earning nothing. Where I live (Czech Republic) I earn 4.7% on a savings account in the bank, so that would more than compensate for the 2% "loss" of drip feed vs lump sum.
You can assume that your savings account is in debt portion as well. 60:40 allocation to stocks:debt.
Excellent!
thanks
@Ramin - how do these studies deal with the idle cash for drip-feeders - are they presuming NO interest (which is what I suspect)? How does the analysis change if you are getting 1% interest on idle cash? 2%, 3% ... etc. Is there a break-even interest rate? Here in the US we can invest in I-Bonds and get 9.62% interest, risk-free (although the investment is limited to 15K (or so)/year.) I see I-Bonds as a priority over the stock-market right now. Then I would consider Treasury Inflation Protected Securities as my 2nd priority. The TIP etf pays a similar 9% yield, although, it can lose principle. I will use the FED actions as my timing cue - when they back-off their tightening program, I will direct more of my inheritance towards the stock market.
I’m 100% in equites at the moment. Have a lump sum imminent from a property sale.
Will be buying IGLA for some protection. Looks a good time to buy this fund as it is languishing at a near 5 year low.
Lump sum investment has been better in the past, no guarantee and in fact I highly doubt it will be better in the future. If we have a growth of financial assets like some of the emerging markets ETFs have, where if you bought the etf at inception and sold today you might be barely up, if up at all, because of how volatile they were. But if you DCAd, you would be able to exploit the significant drawdowns and you would be up, perhaps even nicely. This is why I see 100% lump sum as a risky strategy and advise either a 100% DCA over a few years, or a combination like 10/20/30% lump sum and 70% DCA.
is it better to add a bit more to a position as it rises, add a bit more to a position that has fallen, or just equal weight the positions in a long-term dividend portfolio?
Some drops can take many years to recover the original value back. Look at what happened in Japan 1990s - still not back to the same level 30 yrs later.
Would be great if you could make episode why people should not sell their bonds in current environment.
Can't belive this info is free. Great job.
Glad you think so!
I must be one lucky bastard…. I had to bail out of all my super and that happened in Dec 2021 the top of the market…. Looking at the stocks I was going to invest in have dropped on average 28% and I don’t think these will rebound until the market capitulates… I get what you’re saying about staying in the market if you had invested in 1929 you would probably not have made your money back till 1950 to 1955….. that is silly
"We will never know when a crash is about to happen ..." (08:54) Well its going to happen in the next 3 months I mean that's what the media have been telling us for the last 5 years right!
🤣
Another great video Ramin. Thank You.
Just one thing though that never seems to get mentioned in this debate- it’s not just time in the market, but rather how much time have you got to be in the market.
Sure, a 25 year old with a lump sum could throw it all in on day 1 and ride out a near term crash but what if you were say 65, could you take the risk of a lump sum investment. If there were a crash shortly after your initial investment, the market may not recover before you die. Although the market has drifted higher over multiple decades, there have also been decades where it didn’t recover at all. Anyway, just a thought.
This is a factor worth considering, but a 65 year old should not be investing in risky assets
Hi @Les James yes you are correct and in fact I did a whole video called Retirement Sequencing Risk and Mitigation Strategies for our Premium website members www.pensioncraft.com/patreon-post/retirement-sequencing-risk-and-mitigation-strategies/
@@Pensioncraft Thanks Ramin. Thankfully 65 is still a fair way off but I will check out that video. Cheers.
Did the data mention the amount of Lump sum that was made ? Can a salaried person do a quarterly or 6 monthly lump sum as opposed to monthly?
are dividends taken in to account?
Pound cost averaging Sir. Makes sense to me.
Lump sum generally wins over the dollar cost averaging.
Hpw often should you drip feed?
Another excellent video on a very difficult subject, thank you. I've been considering this very problem today... I've settled on a combination approach of drip feeding and market timing (I can't help myself- even with your excellent videos)... Probably to my detriment I consider the tail risks of today's environment greater than the opportunity cost of drip feeding over a longer time frame too... So I am currently considering drip feeding over a two year time horizon but preparing to lump sum the second years amount in tranches at set valuation levels- say 30% of year two's dosh at a 30% decline level and another 40% of year two dosh at the 40% decline level. If the market doesn't decline over the next 9 months consider accelerating the drip feed to an 18 month one.
I open, I like while the adverts play, then never miss a second! Thank you, Ramin, you are a man of great sagacity
Glad you enjoy it!
Drip feed as status quo + lump sum when there are crashes?
Very good video, thank you
Thank you too!
That's why I'm going to invest in REITs so I don't have to worry about timing...
Money would be sitting in my home loan offset accounts so that's a good amount too
Thanks so much for the information here - I’m drip feeding into LS100 each month as I get paid. If doing this through the vanguard platform is there any disadvantage drip feeding each in extreme manner fee wise? For example, investing £15 a day? I’m not going to do that but just doing an extreme example to make my question clear haha! Thanks!
Just drip feed in the method that’s most comfortable for you and what the platform allow. I highly suspect there’s little difference drip feeding weekly or monthly. The main thing is you’re saving towards something at least.
Pound cost averaging is the way to go for me.
I like to try and buy on the dips and it allows me to sleep easier at night. If historical data show a 2 to 3% loss to lump sum investing then I can live with that as picking quality stocks ahead of dividend payments and getting a small amount of interest on my cash too brings those numbers down.
It’s really hard though. It drops, you put your money in and it takes about 2-3 days for your order to be processed, in this time it goes back up usually. So, you never actually buy the dip.
This never gets mentioned.
@@VoiceOfThe I am not sure what you mean exactly. I am talking about instant share purchases of UK listed companies where the deal happens instantly.
@@mattsennett
Ah, you’re talking about day trading.
I take a more passive approach.
@@VoiceOfThe No I don't day trade. I have a strong dividend paying portfolio of UK listed companies which I buy more of when their price dips. I don't lump sum invest or try to time the market but make decisions around when to add based on individual company share price movements / news etc.
All companies no mater how solid they are go out of favour at certain points in time and it's these windows of opportunity I look out for.
@@mattsennett
I see. I don’t know if that classes as day trading, or not. Certainly you’re actively managing though. Good luck anyway.
Excellent research... Thanks Ramin!
Glad you liked it!
2% difference between drip and lump. However, if you lump summed this year you would have been destroyed, whereas Drip never has this problem. The downside of Lump Sum is massive, the upside 2% better than drip, whereas Drip your downside is greatly minimized.
Exactly, you're giving up a bit of upside for quite a bit of downside protection. As an individual investor I'd rather have that security than bet I won't end up in one of the outlier scenarios where lump sump goes wrong.
Although stock price is important. Don’t forget to calculate the intrinsic value and see if the company meets your goal. At the end of the day, for long term vesting the hills and bump will smooth out in 10, 20, 30 years. It’s possible someone can drip feed into a poor company that never comes back. 😅😅😅
Correct, for a select short term window, drip feed can be better than lump sum but You are still thinking in the short term.What if we fully recover by the end of summer, now your dca amount per month will have high avg than the what it would have had in the beginning of the year ( for the next 4 months). You can run a million very specific scenario and DCA can beat the lump sum depending on the conditions. But in general you are better off with lump sum or a short DCA timeframe.
@@sarchmaster5779 You read my mind. I see drip-feeding as a hedging strategy and giving up a small theoretical upside for downside protection is a perfectly sane approach to risk-management practiced by the entire hedge-fund industry.
It's only 2% over a 1 year period. Lump sum outperforms drip even more with time. So over 10 years it won't be 2% it'll be way more. Time in the market beats timing the market.
The problem in my opinion is that if the FED decides to raise the rates just by 0.5%, markets can become expensive overnight when measured by the excess cape yield. And given the abnormally low rates and abnormally high inflation now it's very likely to happen.
@FreddieBob It's ok, the decide word is not my main point. It's the fact that they're likely to do it in the current environment.
If it's very likely to happen it's already in the price
I understand the theory, but is lump sump investing by (say) adding £4000 into an LISA once a year also drip feeding just with longer inter deposit periods. I'm long term investing in a LISA for my daughter, currently at University so not real concerned about day to day, or even month to month peaks and troughs. Not really even bothered about year to year, currently as the money will be in there for 35 years. Great content, and extremely well presented!
After years of drip feeding you are most likely invested with a pretty big lump sum. That is why I think both investing methods lump sum or drip feeding are equally scary. It all depends at what stage of your investing journey markets crash. And obviously no one knows that.
Up to a point, if you hit a bear market after many years of bull then mentally you might still feel to be "above" the money you invested. Sure you would be up 10% instead of 40% but it's a different feeling then being 20% below if you had just started.
@@riffrff I agree but how can you know up front that during many years of drip feeding market will be in bull mode. Odds of that are high but not guaranteed. You can drip feed and see loses for years. Yet that would be ideal scenario for maximising returns over very long term (decades) - drip feeding when markets are in bear mode.
Good investor should be comfortable with feeling uncomfortable.
I consider myself a good investor but recent bond market downturn has completely surpirsed me. All those financial blogs/vlogs were keep telling us how bonds and stocks are negatively corelated with each other and look where we are now.
I don't mind stocks falling a lot because I understand the risk. But with bonds, recent falls come as a nasty surpirse.
High inflation weakens negative bond/stock corelation. If I only knew this earlier, but absolutely no blog/vlog I folow has ever mentioned this fact.
I have this issue coming up in the next month I don’t need this money for at least 5 years probably 7 or 8 The best way would be invest in one go then never look at the markets again for 5 years but unfortunately No human being could ever do that so it’s going to drip in
People always forget the psychological aspect when investing. The idea of being able to "buy cheaper" motivates you to keep investing and keep invested. Lump sum doesn't really scratch the itch that way. Cause you shoot once and then either be happy or regret that one decision
Why not buy dip with a luv sump of dca
Such a great informational video!! UA-cam algorithm bless this man with your magic.
thanks so much
The market is basically "real" inflation.
If you believe that the monetary system is not going to change then invest in stocks.
When the market trend is up...lump sum wins. When the markets are falling...drip-feed wins.
Gold until aa pvevof 6
DCAing.
Is it better to save 1k a month to 10k then lump it after 10 months or dca 1k a month? I dont have a lump sum
DCA
You should be very lucky, to be able to put 1k away every month. Don't put all your eggs in one basket, and make sure you have enough cash available to live on for 6 months and some to pay for emergencies, like your cooker packs up, fridge freezer or car needs repairing, home repairs etc I would invest the 1k every month, not save it up in the bank for 10 months and then invest it all in one go
@@fredatlas4396 I just started investing last year aged 35. I’m currently 27% down but I’m going to dca as much as I can to average down durin* the dip/recession and hopefully in 20 years retire
Another reason to drip feed is you can take profit gradually as the markets rise, starting with the lowest priced stocks. You don't have to sell in one lump sum. You take profit over time so that you can try to sell at peak price.
Perhaps drip feeding works best when markets are trending sideways for a period of time, say 3 months? Drip feed to buy when price is at lowest range and sell at high range?
The difficulty of averages is that 99% of real life events are different
Hmm, I'm not convinced! Japan is always quoted as an example of how - if you're unlucky enough to buy at a peak - you might have to wait decades before your investment returns to it's initial value. Ramin I'm sure you've done a video showing the same thing, no?
I'm not sure a separate video is needed for that. Throughout the video, he shares data that the median return is less than that of lump sum, but there were roughly 30% of cases contrary to that. Japanese market would likely fall into that kind of statistical margin.
True. This video is about US UK and Australia. I wonder how it works in China, Poland, Argentina etc. Not every investor invests in SP500
If you are under 35 and a high income earner (over 120k), lump sum is a better option as market tends go up over time and you have a greater chance to earn lots more over the next 35-40 years.
Don’t underestimate that 2% difference.
Don’t waste your money on parties and fun things in your late 20s and early 30s. If you do it right, money will work for in your 40s and beyond.
Are you allowed to have a life ?
Under 35 making over 120k? Which movie is that?
@@giovannitardini5248 depends on what industries you are in, it’s common among IT, engineering, and Finance.
@@johnristheanswer it’s subjective. Don’t over spend on those things… I wasn’t thinking about living in mom’s basement and eating ramen to save money.
@@johnristheanswer When you're 70 :)
Unless you can time the absolute bottom and have a large sum to invest at this exact time DCA wins.
On a short term bounce trade yes.
On a stupid I'm holding til I retire in 20 to 40 years... hell to the no... you should have been DCA profits out since November to December.
DCA is a type of timing of markets. And it doesn't take too many brain cells in realizing... oh wow look at that run up... oh look at all the market indicators...
You can tell a dumpster dive or a pump to stupidity is happening. It's not difficult.
Warran Buffet bought before the (ahem) ... "ABSOLUTE BOTTOM" in 2008.
When asked why didn't he wait, he replied. "You never know the exact bottom. I just knew I was much closer to the bottom than the top."
@@jmitterii2 as a complete newbie back in july with a lump sum to invest I saw this pump up and thought it was mad and that it will correct downwards, all the experts told me I was daft and just to invest it straight in or dca over 6 months max.
I made my decisions based on this advice but my gut told me not to invest at all lol, I invested quarter and it went up and I invested another quarter and saw it go down a bit , i took it all out and waited and saw it all go down a LOT.
If I'd listened to my own gut I'd be 15k better off lol.
My gut is telling it's going to go down further but slowly and erratically for a few years and the recovery (if there is one in these times ) may take even longer maybe 5 years or more.
Problem is I'm heading towards 60 and already retired and cannot afford this money to disappear I either inflation or even faster in stocks.
@@michaelfelli7661 the absolute bottom wasn't in 2008, it went down further in 2009
@@FlyingFun. surely you should have just put it all in, in July. I presume you are talking about July 2021. Investing isn't about the short term movements of the market, it's a long term project. You could have put your money in a vanguard lifestrstegy 60% equity, medium risk investment. And just left it to do its work. You are trying to time the market, and this is usually a losing game. It's not timing the markets it's time in the markets that counts. Just stick to a passive approach, use index tracking fund, or funds or etfs that track indexes will do the same as open ended index funds.
You're right, markets only go up in an almost straight line. The market is so easy.
isn't 99% of investing drip feed? Afterall most people get paid monthly. Also a lump sum can burn a hole in your pocket.
These concepts probably apply differently depending upon how skillful someone is (or isn’t) with charting tools. If someone has a stack cash on hand to invest, he or she is either going to get a big DISCOUNT on the going price of a stock or else will get stuck paying a big PREMIUM for their lack of knowledge.
'only around 2%'
2% is an enormous amount, I'm not sure why you are downplaying this.
£100 000@5% for 50 years = £1.1M
£100 000@7% for 50 years = £2.9M
your logic is wrong, both will have the same growth year over year after in the market, just DCA will be 2% down in year 1 as its not been in the market for the full year like a lump sum would be, so there will be a difference, but relatively small - compared to your example at least
@@jackholland10 I think you're misinterpreting his example. He is assuming a person was doing lump sum investment vs. DCA EVERY year for the 50 years, not just the first year. If this applies EVERY year, the 2% outperformance YOY compounds over the 50 years so example he gave is valid in that case. In the case where the investment is only being made in the first year, then yeah, the 2% outperformance won't make much difference.
@@firsargentum5920 Also your logic is wrong here, doing 1 big payment per year vs monthly investments is DCA too, but the intervals are increased. Once the money is in the market, assuming they are invested in the same assets, the rate of growth will be the same, the only bit you miss is the initial growth when the money was drip fed into the market held as cash. on the example about assuming DCA for a year vs lump sum, it would be 2.9M vs 3M. Not a massive amount given its over 50 years
No, you should compare 100 000 with 102 000 (result after all capital is put to work) and then compound against the same rate. This would boil down to 1.146M versus 1.169M.
@@silentwilly2983 yes at 5% interest, at 7% it's around 3m