Dollar Cost Averaging - Is It A Good Investment Strategy?

In "Dollar Cost Averaging - Is it a Good Investment Strategy" I discuss how, in this uncertain market, some investors are overcoming their fear of loss.
In this video, I explain what dollar cost averaging is, whether it is a good investment strategy, how it compares to lump sum investing and when it is most likely to work. I also review some of the platforms that will enable you to put dollar cost averaging into practice whilst keeping your fees low.
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Recommended PensionCraft KZbin Playlists
- There are many different types of investment strategies. In this playlist we look at a number of these so that you decide what is right for you. • Investment Strategies
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- Building blocks for your portfolio • Portfolio Building Blocks
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#DCA #Investing #PensionCraft

[@Pensioncraft]

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[@0tispunkm3y3r]

Very interesting, but at the same time, the DCA method is realistically the only method for many of us... we don’t have large stacks to lump in, but we can knock aside a few hundred a month to invest instead of sticking it in a savings account that is going nowhere fast.

[@Pensioncraft]

Thank you for watching and sharing your views.

[@FreeCryptoClass]

Trying to time the market isn't my style. I don't have that many active brain cells left, Lol. Your spreadsheet really opened my eyes. I can't believe the spread was so low. You can DCA daily, weekly, bi-weekly, monthly, or even yearly. DCA protects us from our own emotions.

[@jbullionaire2749]

Just need to convince my employer to give me my next 5 years salary up front, then I can do some proper lump sum investing :p

[@jc.1191]

Be sure to get those raises and bonuses up front to. 😉💰

[@theolegeris3447]

Great video, thank you 😊

[@iainreeve4522]

Dollar/ pound cost averaging always struck me as something which is appealing but limited. It is appealing because it's easy to explain and seems to be a win/win. It is limited because it does not always (often) produce better returns than lump sum investing. I suppose it's a good thing if it encourages people to save regularly, say by investing a proportion of your monthly income. But I'm less convinced by the idea of splitting a lump sum into so many regular payments, especially at the moment when interest rates on savings are extremely low. Do it if it makes you feel better in uncertain times, but don't expect great things from it.

[@NordicFinans]

Fantastic video, super informative! Loved how clear cut the explanations were and backed up with studies! Absolutely fantastic job!!👍

[@Pensioncraft]

Thanks so much Nordic Finans

[@adamb2216]

I basically did lump sum back in April. But now that we are entering September, I’ve been debating - for the time being - to do DCA in the event that the markets continue to slide. But once the economic situation is clear and markets are resumed normal, I’ll likely go back to lump sum.

[@akakhbod]

Thanks so very much

[@Pensioncraft]

Your very welcome Allenky.

[@FreeyourFinance]

Thanks for a great video as always. I personally dollar cost average a cross all of my low cost index funds. Some argue it’s not the best idea, especially as markets usually tend to go up, however I prefer it! Take care.

[@jc.1191]

Yeah. They don't have to go up.

[@DRJUDE]

great video.. Thank you!

[@Pensioncraft]

You are welcome!

[@OlaOla-so3il]

I read an article comparing USA, UK, Emerging markets drip feeding. Emerging markets actually did the better than SP500 and UK cost per averaging because the price goes higher and lower more often in emerging market funds

[@Neonomide]

There exists a boosted version of DCA, which involves following p/e of market index like SP500 and investing more with lower p/e values and less while index is higher. Using software for tracking sliding averages can help figuring out the sum. Intervals could also be modified, so it’s an active strategy, not very passive but it has quite easy to implement rules anyway.

[@Pensioncraft]

Hi @Neonomide I discussed an approach like this in a members only video called "Would a CAPE allocation rule have missed out on the 2009 to 2020 equity rally?" www.patreon.com/posts/would-using-cape-37882280 Thanks, Ramin.

[@btm1]

this is exactly what I am doing too :)

[@inertiaforce7846]

There's only one problem with this. If higher PE ratios become the norm now that trade commissions are gone and fractional share investing is allowed. This could cause investors to become willing to take on higher PE ratios than historically. If something like this occurs, you miss out because you put less in during the higher PE ratios.

[@mutton_man]

Do you know how much lump sum outperforms dollar cost average by? If it's less than 3% outperformance then is it ever worth the risk?

[@btcee611]

Hi Ramin, do you agree then that DCA is better for more volatile markets and shorter-medium term investments, but LSI is often better for long term investments such as equity funds?

[@djpuplex]

Time in the market is better than timing the market. But when the market on sale you should buy more if you can.

[@Pensioncraft]

Hi K Roddy I agree, I guess for some people the prospect of risking their life savings in equity is just too daunting so dollar cost averaging offers a way to get time in the market. Thanks, Ramin.

[@michaellongland6724]

I would welcome your thoughts on Trading 212’s invest and ISA accounts. Appears to be U.K. version of robin hood.

[@johnnychivers1244]

Thanks for the video. I don't see the Robin Hood link in the description?

[@Pensioncraft]

I've added it to the description now, thanks Johnny!

[@jmc8076]

FYI Ramin just a heads up for some reason KZbin is unsubscribing people from some channels. I can guess why but will leave it at that. Cheers 🇨🇦

[@Pensioncraft]

Thank you for informing us.

[@punkrock666]

Thanks for the video Ramin. It'll be easier to support if you put your robinhood link in the description.

[@Pensioncraft]

Hi punkrock6660 that's done now, thanks! Ramin.

[@giorgioc8263]

Got lifetime ISA at AJ bell. I am planning to to build ETFs’ DCA with regular monthly payments , should I use II as recommended in the video or can I stick to AJ Bell for practical purposes ?

[@weijie9851]

If I buy S&P 500 ETFs, should I dollar cost average or lump sum invest?

[@gerry2345]

I like this vid Good insight. I have clicked on the Robin Hood link for you.

[@Pensioncraft]

Hi GerrysPlace thanks for clicking on the link! Ramin.

[@lifestoryguy]

the debate between lump sum investing and dollar cost averaging is interesting but it's important to note that not all lump sum investing or dollar cost averaging is the same in the human psyche even if the strategy plays out in predictable ways. For example, someone who comes into a small inheritance of £10,000 and just sticks it straight into the stock market probably has a different outlook to that money to someone that has spent one or two years to save £10,000 and then wants to invest even if £10,000 is still just £10,000 from a purely rational point of view. In one instance that individual has effectively been given free money and in another they have had to earn every penny and sacrifice other things over a long period to reach £10,000. Also in a general sense, there are competing investments that people have to balance too. For example, the same £10,000 you could invest in the stock market could also be used to put down a deposit on a very cheap property you plan to rent out which will generate a monthly income you could then use to dollar cost average into the the market. The question is should someone who's looking to put down a deposit on a rental property that will increase their immediate cash flow risk that just to put the same lump some into the market? Perhaps in an instance like this it might be wiser to put the lump sum into a property then use the rental income to dollar cost average for 10 years in the market, no?

[@keerankirubakaran432]

Hi, Great Video👍🏽 In terms of using an ISA allowance is it better to feed your money in every month as you earn it or is it better to wait till the end of the year and invest upfront disregarding fees.

[@Pensioncraft]

Hi Keeran, in a rising market you're better off investing as soon as possible. In a falling market it's the opposite. Most of the time equity markets rise due to their upward drift so it's best to put it in monthly. Thanks, Ramin.

[@benjamindover2601]

@@Pensioncraft I'm glad to hear that, the majority of people just don't have the capital to invest a significant lump sump, I'm glad those of us investing a percentage of our earnings have a chance at financial independence in a bare market. (When the market rallies, which over a long enough time period is 100%)

[@benditto1295]

I am using Freetrade, I also dollar cost average but always some cash for good buying event. I just wish Freetrade had more exchange trade funds. Unfortunately they don’t have mutual funds for some reason. Nevertheless it’s free and beggars can’t be choosers. Keep up the good work Ramin. I enjoy your videos and thank you for your hard work.

[@iCodf]

Freetrade is terrible at adding stocks 250 in 6 months isn't good enough

[@ckioanna]

I’d switch to trading 212 if I were you. Far better app, fractional shares, all company financials and ratios available

[@sgist7824]

@@ckioanna You can buy small amounts in Freetrade too

[@JimmyJoseph1295]

@@sgist7824 Trading212 has 5 times more stocks and 10 times more ETF's than freetrade. also no £3 per month charge

[@benditto1295]

Do they have an isa?

[@xinhuang4529]

What time is your Sunday night chat? I am in US, Eastern time. Thanks

[@Pensioncraft]

Hi xin huang it's at 8 pm UK time, 3 pm Eastern Time 12 pm Pacific. Thanks, Ramin

[@Citizen-of-theworld]

I dollar cost average a different way (maybe it’s not called that). When I buy a stock I believe has great long term growth potential, I buy an amount of stock and then buy more only if the stock falls by a set amount (usually down 10%) if one of my other stocks is temporarily underperforming (with good justification) I buy more of that one. So I average down on price rather than time. It’s important here to recognise the difference between temporary weakness and a company with declining prospects.

[@Citizen-of-theworld]

Also, thanks for the great informative video by the way (I implicitly thought that more often than not dollar averaging doesn’t help - especially if you select a company that has a great stable growth profile.

[@Pensioncraft]

Hi Jonathan Ball thanks for sharing that. I guess that's a bit like rebalancing? I guess single stocks can go to zero if the company goes bust but I doubt you buy companies which have shaky prospects. Thanks, Ramin.

[@Citizen-of-theworld]

PensionCraft yes! Early on I did make a big mistake averaging down on a speculative company Sirius Minerals which pretty much collapsed and that was a big mistake. Had much more luck doing this with GOOGL, AMZN, FB, PYPL, but one could also apply this approach to index ETF’s as well. Recently I have just taken a little of the profits off these 4 names and rotated into very defensive positions because I believe stocks have become over valued again very quickly. Irrational exuberance????

[@JamyOats]

@@Citizen-of-theworld have you compared your returns to what you would have got if you just bought and held amazon Google etc?

[@sachmedia1]

I'm still investing on a monthly basis but the bulk of my monthly investable allowance in LS20 rather LS100 or other equities. Had halved the amount I'd put into equities at the moment and holding that money in cash as I belive we are going to see another crash so £cost averaging and trying to time the market. Markets simply did not fall enough in comparison to other market crashes.

[@NZAnimeManga]

Wut, in terms of % it was one of the biggest crashes ever?

[@jamesmoore5917]

Completely agree pulled out 50% of my portfolio on Friday, markets are acting crazy at the moment

[@MICEVVV]

First lump sum than do the dca. How? After you invest everything you have at the moment, you can rely on your paycheck to put aside some money for dca. If unemployed, just sell small percentage of the portfolio to have money for the dca together with money for spending. Do that until you have to sell shares again in order to continue the dca. I see that as you get the benefits of dca every month, and if the market does go up ALL THE REST of the portfolio which is not set aside for dca will rise.

[@giorgiomindset]

Great content as usual! Do you think UK users should switch from FreeTrade to Robinhood when it becomes available? Or is there not really any difference? Thanks

[@Pensioncraft]

Hi Gioology, It's difficult to say until it get's launched but according to their website the initial UK offering will be quit limited. I've contacted their press office to see if I can get any more information but I have heard nothing back as yet. Thanks Ramin

[@giorgiomindset]

@@Pensioncraft Thanks for the reply! I'll stick with FreeTrade for now.

[@EB-mu9ex]

Does lump sum work with index funds? You didn't mention about the Japanese market which hasn't returned to all time highs in the last 30 years. If I lump sum at the very top have I lost money?

[@IncomeBoost42]

Yes it works with index funds but because index funds tend to be more diversified and less volatile, it reduces the benefit of DCA.With regards to Japanese stocks not recovering, yes you’re right, it’s a risk that’s present in all economies with low growth, low interest rates. However, the general expectation is that growth will pick up in the west, however nobody can really see what the long term holds.

[@conormcgregor2547]

How about the expected value of dollar cost averaging during a downturn vs just putting it all in one?

[@manatee1999]

You should talk about what NAV means in a index fund? I only put money to work when the fund is down 30% or more other wise i am sitting on my cash. There's nine ways to skin a cat.

[@thwhirid]

So you missed out on the bull run from 2009 to 2019?

[@terran236]

@Sunshine Ng think positive the market is always moving up no matter what. There's always going to be bearish times and bullish times but in the end the market is always moving up

[@lanwan]

+1000 places 👍 I have to dollar cost average, but try to make shares purchases of the same value each month after I get paid. No other way that I can see

[@Pensioncraft]

Thanks for clicking on the Robinhood link Wan Ducky! Ramin.

[@tcb106]

I was wondering whether you had also looked at IG’s smart portfolios at part of your research?

[@jmc8076]

Tcs106 I know you wanted Ramin’s take but reviews from quick search (literally seconds). Always look to see if reviewer is incentivized (monetary or other payback in recommending) for context. Cheers www.finder.com/uk/ig-review comparetheplatform.com/robo-adviser/ig-smart-portfolios/ www.boringmoney.co.uk/isas-pensions/ig/

[@tcb106]

@@jmc8076 thank you for the links

[@tusharprasad2734]

Lump sum will seem a disaster if the 10 year period in US started in jan-2000 or oct-2007 😉

[@Pensioncraft]

Hi Tushar that's right it only works 2/3 of the time for that very reason. Unfortunately, we don't know when the next drawdown is going to happen. However, you only lose out if you sell at the bottom e.g. if you bought in 2000 and waited until now without doing anything your return would eventually revert back to the long-term average of 6%-ish real return. Thanks, Ramin.

[@Rawdiswar]

I plan on DCA-ing my way into a 3.5% position of BTC. Prudent or foolish?

[@Bigboss-xe6lm]

Its gambling. But better than a casino imo. Better put it in an index fund

[@Tepalus]

Everybody's talking about DCA vs Lumb Sum as it is a choice we could make. Yeah sure i would put 100k USD into the market right away. But let me sit on my money for 10 years until i have that amount. Really, this comparrison is extremely flawed. It's like saying a 5% yield a year is perfect for a millionaire, so it has to be good for someone with 100 USD. The REAL longterm strategy is to constantly invest every month (in specific companies you researched), and as they grow you take out your original investment as soon as they hit a gain of 100% and reinvest it somewhere else. Congrats, you now own a part of a company for free. You also can optimize by having your set portfolio of companies and just invest in those that are down at the moment.

[@iCodf]

Ramin needs those hairdressers to open soon!

[@Pensioncraft]

Hi Codf Mcdodf yes it's getting a bit unruly in the hair department! My dog Teddy and I usually go for a trim at the same time but we haven't been able to for obvious reasons and we're both a bit shaggy 8-( Thanks, Ramin.

[@BenCarnage]

For most people it doesn't even apply, since you'll have an income that supplies most of the money you could invest, which generally comes once a month. So you're going to dollar cost average, because that is the nature of a regular income. Most people aren't sitting on large sums of cash where this makes a grand practical difference. The key, as hinted in the video, is to invest. If you set up a monthly contribution indefinitely it will be overwhelmingly likely to beat your lump sum today. Buy a broad passively managed index fund every month that doesn't come with any purchase fees and has a low maintenance fee. Then ignore it for the longest possible amount of time. Congratulations, you've won at personal finance.

[@shimeymerih]

Who does lump sump investing anyways?

[@Pensioncraft]

Hi Yelen, usually people have a lump sum because they've sold a property, inherited money or sold a business. Others are moving a pension and want to think about building their own portfolio. Thanks, Ramin

[@shimeymerih]

@@Pensioncraft Thank you for clarification.

[@dannybb8484]

Interactive investor charges £10 a month for an ISA account that seems expensive, why not set up a direct debit with vanguard or freetrade directly, surly thats a cheaper way of dollar cost averaging?

[@Pensioncraft]

Hi Dan that depends on how much you invest. Vanguard charges a platform fee of 0.15% per year so below £80,000 that's cheaper than Interactive Investor. But if you have more than £80,000 Vanguard's fee increases above the annual fee for Interactive Investor (£120). It's a bit more complicated because you might have to pay for trades on Interactive Investor which you don't on Vanguard so that can push up the breakeven point. Other platforms _can_ be cheap if you avoid funds e.g. Hargreaves Lansdown. But this is a big limitation. Thanks, Ramin.

[@round12tko]

Investing and gambling....it's all the same. Assess the risk and place your bet

[@Pensioncraft]

Hi Crash 2020 the main difference between gambling and investing is control of risk. Investment gives a slow, steady reward over decades with a low probability of loss, gambling gives a high probability of loss and a potentially high payoff. Investment is boring if you do it right. Gambling is designed to be exciting. Thanks, Ramin.

[@tusharprasad2734]

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