Stocks and Shares ISA

JohnRo

MK62 wrote: »

They also stated that an investor would have made a loss more often using lump sum investing and those losses would have been bigger, on average, than using cost averaging.
With cost averaging (or drip feeding), you get some downside protection, but as ever there is no free lunch.....that protection can cost you some gains if markets rise.

Are you sure you've read it?

https://personal.vanguard.com/pdf/s315.pdf

The conclusion Vanguard make is that cost averaging just defers the risk until later.

It states,

On average, we find that an LSI approach has outperformed a DCA approach approximately two-thirds of the time, even when results are adjusted for the higher volatility of a stock/bond portfolio versus cash investments.

LSI is lump sum, DCA is..

We conclude that if an investor expects such trends to continue (that the returns of stocks and bonds exceeded that of cash), is satisfied with his or her target asset allocation, and is comfortable with the risk/return characteristics of each strategy, the prudent action is Vanguard research July 2012Dollar-cost averaging just means taking risk laterAuthorsAnatoly Shtekhman, CFAChristos Tasopoulos Brian Wimmer, CFA
2 investing the lump sum immediately to gain exposure to the markets as soon as possible. But if the investor is primarily concerned with minimizing downside risk and potential feelings of regret (resulting from lump-sum investing immediately before a market downturn), then DCA may be of use

Mark_Bedford

It is also a very convenient marketing ploy for Vanguard....a drip feed potential customer is more likely than a lump sum one....

MK62

This is what the conclusion says in the report I read

Conclusion
Clearly, if markets are trending upward, it’s logical
to implement a strategic asset allocation as soon as possible because it should offer a higher long-run expected return than cash.
Historically, a long-term upward trend has persisted for both equities and bonds, probably attributable to positive risk premia in the markets. In other words, positive returns have compensated investors for taking risks, hence the upward trend in those markets and the resulting probabilities of success for LSI. So, to the extent that an investor believes the
positive risk premia are likely to exist in the future, LSI would remain the preferred method for investing an immediately available large sum of money. But if the investor is primarily concerned with reducing short-term downside risk and the potential for regret, then DCA may be a better alternative.
To be comfortable with either strategy, an investor must be fully aware of the fact that historical averages are only a guide—it is still possible for LSI or DCA to underperform or even lose money in any given period. If an investor is uncomfortable with the risks associated with a given market entry strategy, it may imply a low willingness to take risk in general,
and if so, we recommend revisiting the target asset allocation to ensure that it appropriately addresses risk tolerance levels and investing goals.

And just before the conclusion it says...

We found that DCA performed better during market downturns, so DCA may be a logical alternative for investors who prefer some short-term downside protection.
Out of the 1,021 rolling 12-month investment
periods we analyzed for the U.S. markets, LSI
investors would have seen their portfolios decline in value during 229 periods (22.4%), while DCA investors would have seen such declines during only 180 periods (17.6%). Furthermore, the average loss during those 229 LSI periods was $84,001, versus only $56,947 in the 180 DCA periods.
The allocation to cash during the DCA investment period decreases the risk level of the portfolio, helping to insulate it from a declining market.
It is essential to point out, however, that this
temporarily cash-heavy asset allocation is much
more conservative than the investor’s true target
allocation (the one that will exist after the DCA
period) and that, while this short-term deviation
from the target provides some relative protection
from market downturns, it does so by sacrificing
some potential for greater portfolio gains. As with any asset allocation decision, investors must determine for themselves whether or not reducing their portfolio risk in an attempt to avoid losses and regrets is worth reducing the potential for higher returns.

MK62

Apologies for the formathing in the previous post.......on my tablet cutting from a pdf screws it up......;)

JohnRo

Quite right, but it doesn't sit well with the post I replied to in which you've claimed..

They also stated that an investor would have made a loss more often using lump sum investing and those losses would have been bigger, on average, than using cost averaging.

In fact it states the pretty much opposite in that around 2/3 of the time LSI is superior. There will also be a region either side where neither makes much of a difference to the outcome which means that for DCA to be a clear winner over LSI you have to roll some fairly extreme scenarios

MK62

I'm not sure which bit you missed, but having better returns 65% of the time is not the same as having less periods of negative return.....

Of the 1021 discrete 12 month periods tested, LSI gave negative returns in 229 of them compared to 180 using DCA........those losses were also bigger, on average, at 84k compared to 56k for DCA. These numbers are lifted directly from Vanguard's report.

You can then extrapolate that LSI must therefore have given positive returns in 792 of the 12 month periods, while DCA gave positive returns in 841, but those positive returns were lower than those achieved with LSI.....Vanguard did not give figures, but stated the average was 2.3% better with LSI.
The "better returns 65% of the time" means that LSI gave better returns in 664 of the 1021 periods tested.....while DCA therefore gave better returns in 357 of them......better does not necessarily mean positive though....a negative return of -2% is still better than -4%.

JohnRo

It's getting off topic but the report set out to analyse how a rolling 10 year investment portfolio would perform as LSI vs. DCA in three markets, US UK and Australia.

As it states 1926-35 1927-36 etc. ending in 2002-2011

For each one of those discrete 10 year periods a LSI on day one gave a superior outcome 2/3 of the time versus a 12 month DCA input in year one.

As they state in the report as well as running the DCA model for a 12 month span, ie from zero to fully invested via DCA in 12 months.

They also ran the same test for shorter and longer DCA spans. Namely 6 12 18 24 and 36 month DCA spans.

What they state is that they found the longer the DCA investment period is (versus the LSI on day one) the better the LSI performed (versus DCA) which makes sense to me given that time out of the market is what has the probability of doing most damage longer term which DCA is a form of in this report.

I'm not even sure what it is you're arguing about any more or me for that matter. Are you saying that in this study Vanguard are showing that DCA gives a superior outcome to LSI (it doesn't) or just that there is a slightly higher risk of seeing negative numbers with LSI (versus DCA) at some point within the ten year period?

What matters in the final analysis is the valuation outcome. The report shows that in 2/3 of cases studied, using the 10 year period in question, the valuation outcome is superior when deploying LSI rather than using (a relatively short imo) 12 month DCA schedule which as they state is simply deferring the risk in those early months.

Thrugelmir

Mark_Bedford wrote: »

It is also a very convenient marketing ploy for Vanguard....a drip feed potential customer is more likely than a lump sum one....

Vanguard's products are targeted towards consumers rather than High Net Worth Individuals.

MK62

JohnRo wrote: »

I'm not even sure what it is you're arguing about any more or me for that matter.

JohnRo wrote: »

Are you saying that in this study Vanguard are showing that DCA gives a superior outcome to LSI (it doesn't) or just that there is a slightly higher risk of seeing negative numbers with LSI (versus DCA) at some point within the ten year period?

of the two choices you've given me here, the second one......the 10 year period is actually irrelevant in the context of the report though.....all that really matters is the DCA investment period....whichever strategy is ahead at the end of that will then stay ahead forever.

JohnRo wrote: »

What matters in the final analysis is the valuation outcome. The report shows that in 2/3 of cases studied, using the 10 year period in question, the valuation outcome is superior when deploying LSI rather than using (a relatively short imo) 12 month DCA schedule which as they state is simply deferring the risk in those early months.

OK, let's put it another way.;).........hypothetically, if a report told you that historically, high risk funds have outperformed low/medium risk funds 65% of the time.....would you also then take the view that high risk funds were the only way to go based on the fact that 65% of the time the valuation outcome has historically been superior?

In the end, we all have our own opinions on investing based on our goals, risk perception and attitude to loss, and these can often be very different for each person.........

JohnRo

MK62 wrote: »

of the two choices you've given me here, the second one......the 10 year period is actually irrelevant in the context of the report though.....all that really matters is the DCA investment period....whichever strategy is ahead at the end of that will then stay ahead forever.

Right, and 2/3 of the time LSI was ahead and stayed ahead, with 36 month DCA they found LSI was ahead and stayed ahead for 90% of the outcomes.

MK62 wrote: »

OK, let's put it another way.;).........hypothetically, if a report told you that historically, high risk funds have outperformed low/medium risk funds 65% of the time.....would you also then take the view that high risk funds were the only way to go based on the fact that 65% of the time the valuation outcome has historically been superior?

You're drawing conclusions of your own that aren't in the report. The 'fund' is exactly the same and the risk being undertaken is ultimately the same, DCA simply defers exposure to that risk and incurs an outcome penalty as a result in 2/3 of the cases studied over 12 months.

DCA reduces exposure to market risk by simply not being in the market to varying degrees throughout the period in question, logically it also reduces market reward.

When the DCA is over a longer period, 36 months, the outcome is penalised in 90% of the cases studied as you'd logically expect.

'it's all about time in the market'

Just because a DCA suffers less periods of loss versus a LSI doesn't mean you can then infer that because the DCA got more periods of growth it logically got 'more' gain and so gave better outcomes more of the time. That's just a bogus interpretation.

Clearly a 1% loss on a larger sum is a larger amount, as highlighted in the report. Conversely a 1% gain on a larger sum is a larger amount, not highlighted in the report presumably because DCA is all about reducing potential for incurring losses (at the expense of outcome most of the time).

That is the only thing that the report is highlighting in the paragraph you seem to have latched on to.

The number of negative periods mentioned and the resulting positive periods says nothing about the timing and magnitude of those percentage gains and losses in absolute terms, the effect they have on the valuation as a whole and ultimately the outcome.

Here's an example of LSI versus DCA over 12 months in a fairly mixed year which suffers losses in the early months, just to try and illustrate (or not) the point of negative periods, negative LSI balances and positive outcome.

MK62 wrote: »

In the end, we all have our own opinions on investing based on our goals, risk perception and attitude to loss, and these can often be very different for each person.........

On that we can agree.