The Undisputed Champion of Investing Strategies?

October 15, 2023

Hello Financial Explorers,

Dollar-cost averaging (DCA): It’s been widely heralded as the mechanism for assured long-term financial stability. The titans of finance, from Warren Buffett to Ray Dalio, assure us that it’s the only way for us retail investors to ever make a return in the market. One of my favorite personal finance books, The Psychology of Money, draws the same conclusion. 

But what if, in our journey towards financial enlightenment, we dared to question this widely accepted truth?

🏴‍☠️ Challenging the Status Quo

DCA’s principle is simple and alluring: invest a fixed sum of money at regular intervals to mitigate the risk of market timing. It’s positioned as a failsafe, a strategy that safeguards your investments against market volatility by spreading them out. But what if the presumed safety net of DCA is not as infallible as widely propagated?

What would happen if we compared DCA with Lump Sum Investing (LSI)? What should we do, if say, we exit our company for $1MM? Should we spread that out over equal monthly allotments as suggested, or is it better to buy into the market all at once?

This study revealed a stark contrarian perspective to the status quo, analyzing the performances of DCA and LSI across vibrant financial markets in the United States, the United Kingdom, and Australia. What unfolded was not merely a ripple but a significant wave challenging our anchored beliefs about investing. 

Through the lens of this research, it was illuminated that, in the U.S. market, an LSI approach outperformed DCA 66% of the time over a 10-year investment horizon, demonstrating a stark contrast to widely-held investment axioms. Meanwhile, in the UK and Australian markets, LSI navigated towards superior portfolio values in 68% and 64% of the historical periods analyzed, respectively. 

While DCA served as a sturdy vessel, safeguarding investors from the choppy waters of short-term market downturns, LSI’s potential to harness favorable winds, amplifying portfolio values and returns in the long run, became undeniably apparent.It is crucial, however, to acknowledge the other side of the coin. LSI’s superiority in average and risk-adjusted returns is tempered by its susceptibility to short-term downside risks, experiencing declines in portfolio value in 22.4% of the analyzed periods compared to DCA’s 17.6%.

🔎 Pondering Point:

My biggest takeaway here is not that one strategy is superior to the other; it’s the fact that advice taken as gospel in the world as finance is not necessarily rooted in truth. This research suggests that dollar cost averaging is the investment equivalent of an old wives’ tale. 

So if we can’t believe even the most oft-repeated adages, what are we to do? How do we ever know how to make the best decision?

📜 Charting a Tailored Path

The fact stands that the financial industry has a vested interest in keeping us in a state of fear and overwhelm, in hopes that we will hand over our hard earned money so that they can navigate this complex world on our behalf (and earn their fees along the way.)

But it doesn’t have to be this way. When we shed the chains of overwhelm and take control of our financial journey, not only do we enable ourselves to make better decisions, but we take ownership of our power. 

The autonomy to carve out a path aligned with our own personal investment thesis is invaluable.

🔑 Key Insight: It’s not about discarding DCA or unequivocally embracing LSI. It’s about embracing the knowledge that allows you to design a strategy that’s unequivocally yours.

🧭 A Compass for Your Voyage:

1. Question & Learn: Dive beneath the surface of general advice to comprehend its applicability to your journey. Challenge the status quo and shift from trying to make the best return to making the best decision for you

2. Craft Your Thesis: Empower your investments by tailoring strategies to your unique financial landscape. Figure out what it is you value and align your investments to serve the life that you want to create. 

3. Embark with Confidence: Navigate with the understanding that your financial journey is singular, liberated from the confinements of generalized investment doctrines. 

So sail forth, merry journeyers, with confidence and clarity that comes with taking ownership of our wealth building voyage – and know that you alone are the most qualified captain for your ship. 

⚓ Anchors Aweigh,


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