Certainly. And when I used to do rollovers for clients, there was an option to DCA into the new account to manage volatility risk.
Yes, and I wasn’t great at communicating my point there. My main issue is with the idea that a market collapse is ever a good thing because you end up with more shares for the same dollar (or any other currency) investment. This is something that many smart people have said to me over my 20+ years managing large portfolios, and it is a fallacy.
Ha - I’ve certainly been guilty of saying it. I think it’s more a crutch to fall back on when talking about and setting expectations with risk adverse investor, the type who are prone to panic at the slightest downturn, and then sell off and lose a bundle. It’s a very thin silver lining that refocuses on the future, rather than the unchangeable past.
This is fair. And in the case of dividend paying stocks, at least you get more dividends going forward (unless the company has to reduce or cut it).
The main effect of market timing is that since stock movements are random for the average investor, you simply pay more in transaction fees for constantly buying and selling, and you keep more of your money out of the market on average. That’s why it hurts.
It has nothing to do with the risk of buying high and selling low. It’s just needless buying and selling, which has a cost.
Stock market is down today. Don’t do it today.
You only lose that money if you actually sell the shares at a loss. Otherwise, you still have the shares and you are buying more for the same amount of dollars. And dollar cost averaging works the same with an index fund or single stocks. DCA is not a diversification strategy. It is a strategy that buys more or less shares based on relative value.
Uh, no. Selling the shares would be a realized loss, and holding on to them would be an unrealized loss. But the value of your portfolio still fell, and that’s what matters. The number of shares is completely irrelevant (besides perhaps the dividend yield that I pointed out). It’s all about the cash.
ETA: This is the same reason that a stock split is neutral in terms of valuation (or actually negative if you consider the costs of executing one).
If the market goes back up you haven’t lost anything if you hadn’t sold. If you continue to buy when it’s down instead of panicking and selling you are accumulating more shares that will grow when the market does.
The value of your portfolio is irrelevant until you decide to sell.
When my portfolio was down it didn’t mean a thing.
Now if you HAVE to sell during a down market because of lack of savings and an emergency arises, yes, a loss of the dollar value of the portfolio has meaning.
This is the sort of thinking that leads people to buy when the market is going up, and sell (invariably at a huge loss) when the market crashes.
It depends where and what you’re buying. My Vanguard VTSAX (Total Stock Market) has no purchase or redemption fees. Part of the reason I recommend Vanguard is low fees. I don’t do managed funds, either, which keeps all that low, too. (Also got that advice from Warren Buffet, IIRC). The expense ratio of that fund is only 0.04%.
Yep. My non-retirement account mutual funds are in Vanguard and they don’t charge to buy or sell. And I buy multiple times/week. I take cost-averaging to a crazy extreme 
In Spring 2020, Vanguard’s S&P 500 fund (VFINX) fell from a high of 312 to a low of 212. Five months later, it was back up to 312 for a gain (from its lowest value) of 47 percent. People who continued buying during this crash were buying shares at a fat discount. Any shares bought during this dip did better than they would have if the market had stayed flat.
Something similar happened during the subprime mortgage crisis. VFINX crashed from its peak of about 143 in October 2007 to a low of about 70 in spring of 2009. It was back up to its pre-crash price four years later. Any shares bought during this dip did better than they would have if the market had stayed flat.
Tell me again why this was bad?
This is all true, but doesn’t support the idea that a fallen market is a good thing because it allows you to buy more shares for the same number of dollars.
And the whole portfolio would have done gangbusters if, instead of a crash, the market had quadrupled and issued 100% dividends for life. The fallacy lies in the fact that the market crash incurs a cost on the economy itself - businesses close, jobs are lost, etc. The market obviously wouldn’t have quadrupled, but it may not have also just “remained flat”.
If you look at the chart you posted in Post 17. It shows a stock market value of $375 in 1928, and shows a full recovery from that point in about 25 years to 1954. You may say that that entire period was a great time to buy stock, since you were getting many more shares for the same investment amount.
Now, imagine that you had been investing a fixed amount per month into the DJIA for the 25 years prior to that (I have no idea if the index was around that long, but I’d prefer not to introduce tulips at this point). You look at your portfolio in 1928 and find that all that dedicated regular investing (call it dollar cost averaging, if you must) has led to have a very healthy portfolio of $1 million.
Now, the market crashes and your $1 million portfolio is now worth $200k. But you say “No big deal, I’m not selling my stock since I don’t need the money for another 25 years anyway. And now, I can buy 5 times the number of shares I was previously buying for the same price. This is great!”.
So you continue to keep putting in the same amount per month as you were prior to the crash. For this exercise, let’s leave out the possibility that you may have lost your job, or at the very least, had to use much more of your income to buy your necessities due to inflation (so you probably wouldn’t have as much to invest).
Fast forward 25 years later to 1954, and you notice that your original $1 million portfolio has regained all the value that it lost in the crash. And on top of that, you gained a crapload of value on all that cheap discounted stock you bought during the 25 years after the crash. That sounds great, right? Well, not really….
If you went back to 1928 and someone asked you to draw a straight line to where you would expect the DJIA to be in 1954, what would that number be? Even at a very modest 5% annualized return, the DJIA would be well in excess of 1,200, not 400. You’d be way worse off due to the crash. That’s what I mean by “the value is lost forever, and you never get it back”. The only way that the idea of a stock market crash being a good thing can have merit is if the DJIA was actually well in excess of 1,200 in 1954. And significantly well in excess of 1,200.
That’s a good argument for the notion of time in market beats timing the market. But most people don’t have just a single lump sum to invest at a known local nadir in the market. And why the years 1928 and 1954?
I picked two random years 1920 and 1960 and the DJIA went from 71.95 to 615.89 which is a 13.6 times increase. (1 + x/100)^40 = 13.6 gives an annual return of 6.7%. That seems reasonable to me.
But all the quibbling aside, what actionable advice to you propose for the average investor?
You seem to be approaching this from the angle that investors can choose whether or not the market crashes - which is obviously not the case in practice. Of course, if not having a crash was an option, that’s what we would choose. We are not saying we would deliberately induce a crash, in order to reap the (supposed, and as you rightly say in this context, imaginary) effects. What we are saying is crashes are inevitable, but if one continues investing regularly through that time, the effect of DCA can increase the overall value of your portfolio compared to the scenario of selling all your investments just before the crash and then reinvesting once the markets rebound to the same level at which you sold.
Or, more succinctly - when investing regularly, a market crash (and recovery) is better than the market staying flat. It’s obviously not better than the market continuing to go up and up forever, but that’s not a realistic scenario.
I believe he’s mentioned that a couple of times. You should read his posts.
Where do I even suggest that? All I’ve done is reject the flawed logic that a market crash is ever good, because you can buy more shares for the same amount of money. I did not dispute any of the basic advice given here regarding re-balancing, not selling your investments (particularly those you’re setting aside for retirement), continuing to invest through it, etc. These are all basic best practices.
None of this was meant to be a hijack, although it seemed to turn out that way. But I think it’s important to make sure that folks reading this aren’t getting any flawed information and then proceeding to spread it.
Finally, here is my very first piece of actionable advice:
For those of you in the US that expect to receive a monthly pension payment upon retirement, or already receiving one, you should keep in mind that this period of high inflation is permanently reducing the purchasing power of that fixed amount you are getting, or will be getting, during retirement. We haven’t dealt with significant inflation in almost 40 years, so people may not realize this and may eventually get blind-sided. There are no cost-of-living adjustments built into traditional US pensions. So if you have the ability to direct more of your income or cash savings into an IRA, or increase your monthly contribution to your 401(k) or other savings plan, you may want to do that. Also, if your plan has an inflation-protection investment option, preferably in the form a diversified Real Asset fund that invests in commodities, REITs, TIPS, natural resources, precious metals, etc, you may want to allocate some more of your savings to these. I was able to get one added to the company plans that I manage earlier this year, and it has performed really well. By the way, some plans have TIPS funds, but these aren’t very good at getting the inflation protection without significant volatility around the CPI. But they are better than nothing.
ETA: By the way, if you do have the ability to set aside more, then you should have already been doing that before the market crash. So the advice to invest more now is NOT due to the market downturn. It’s just emphasizing that it’s even more important now than ever.