Is using the cost average effect a good investment strategy?

A few comments:

  1. Dollar cost averaging doesn’t increase the expected value of your investment
  2. It does reduces the volatility of your investment, in particular mitigating the risk that you will invest the full amount immediately before a crash and lose a large proportion of your value
  3. A strategy which stipulates that you invest a certain amount every month (or every 3 months or whatever) is good discipline as it avoids temptation to respond to market movements by buying high and selling low. Market trending up, everyone says it’s overvalued? Invest $1000. Market falling for the past 5 weeks? Invest $1000. Market just crashed and there’s blood in the streets? Invest $1000. After 20 years you will have ridden through a lot of ups and downs but you’ll have built up a substantial nest egg.

Yes, the psychological component makes sense, I had not factored it in enough. :nods:
A LOT of acronyms went right over my head, I will assume they are US-related and will just skip them. Perhaps I will google them another day.

(bolding mine)
It does not reduce that risk, it seems to me: it just postpones it until the moment you are fully invested. If the crash happens then, you are equally screwed, but have lost the benefits of the rising market before the crash. And markets usually rise before a crash, it wouldn’t be crashy if it hand’t risen before.

The point was just not whether a savings plan where you invest regularly is a good strategy (of course it is, if you can afford to save any money regularly, do it and the result will be riches), the question was why do some banks recommend not to invest all of the money you already have at once? It has been answered, as I suspected, that it does not make much economic sense, you earn on average less. But Tired_and_Cranky and others have mentioned some psychological viewpoints that make the recomendation underestandable to me. I will keep it in the back of my head, it might say something about what the bank(er) thinks of me.

I reckon “steady” would depend on your timeframe and how you feel about averages.

There is no benefit to a rising market before a crash. If your first purchase of X is at $100, the second is at $150, and the third at $200, then the asset crashes down to $50, it’s going to take longer for the market to get back up to $200 for you to break even than for it to get back to $100. Your first purchase was the best one and you would end up happiest if you had bought everything at $100.

In general, a plunging market is better for you than a rising market - crash or no - so long as you’re buying and not selling.

The psychological factor was my first thought too. There’s also the bank’s own risk minimisation strategy to consider.

If a customer of theirs turns up with a (to them) significant windfall and no prior investment experience, then the bank would want to avoid a situation where the customer gets cold feet and pulls out the entire amount at the first downward fluctuation, then complains to their friends.

Encouraging the habit of regular investment therefore likely benefits the bank by longer customer retention.

Another consideration is having the benefit of hindsight: what looks hardly worth investing $100k in at the start of January might change into a better opportunity come February or March. An investor (or advisor) who’s continuously checking the markets for opportunities isn’t being locked into a single big decision - inherently more risky.

If you have a stock that always stays within 10% of its original value, then you can come up with an investment strategy much better than DCA, namely: Always buy when it is below the original value and always sell when its above. DCA is just a weaker version of this strategy.

But stock markets are random walks and such strategies do not work on random walks.

I think the finance industry went for cost averaging as the lowest common denominator, and no excuses lazy approach. By doing so, there is no real value add to timing the investment or the market, and as a broker you never look bad.

I agree one should set aside money every month into a cash account. Then the timing of when to invest this month is a different decision tree.

A real world example, the 2007 Great Recession. Cost average people would have said keep buying every month. Anyone with a modicum of experience knew it would be months if not years before the market bottomed, stocks bottomed. I posit it would have been a much better strategy to have kept socking away the cash, and then start getting back in the market a minimum of 6 months later. This isn’t 20-20 hindsight, it’s just basic experience of stock market crashes and economic cycles.

When was that six-month holding period supposed to start? And since you indicate 6 months was a minimum, what’s the maximum? Since you’re advocating a range of 6 months to [some maximum length of time], how would you choose exactly when to start putting cash back out there? If it’s smart to stop putting cash in the market when you think it’s about to crash, why isn’t it smart to cash out your investments at the same time, and then put your cash back out there some time later?

In short, what differentiates your strategy from “timing the market”?

I’m not sure what the correct answers are, but IIRC the Great Recession started around 10/2008. The market hit bottom in 3/2009, roughly six months later. Of course it may not happen like that next time.

It certainly didn’t when the market crashed in 2020.