AAR45 - Is Dollar Cost Averaging Losing You Money?

21:31Andrew Sather:And dollar cost averaging is a perfect vehicle for automation like that. But Andrew, do you think that dollar cost averaging is a good, do you see it as a good complete substitute for something like lump sum? Or do you, as a professional stock picker who has a really in-depth understanding of the stock market, do you just see it as kind of the easy way out that's good for beginners because it's easy to do, but something like a professional doesn't really need to touch something like that.

21:59Evan Raidt:Oh man, you're asking the tough ones. You are asking the tough ones. I don't want to make it easy.

22:07Evan Raidt:Yeah. I mean, for beginners, for sure, the dollar cost averaging. It's practical. It feels good. I love one of the things I do, a little bad boy here, but I like to put my, what do you call a sinking fund. So I have a car sinking fund that I've got. I love to just dollar cost average that into the market. I've got my Plink brokerage account and it's automatically every month buys a stock that was a recommendation of Value Spotlight last year. And I'm just like, every month we're buying that stock and it goes up or down. I don't care. One day I will buy a car with that sinking fund. And it's, I don't know, there's something about that that's just really cool.

22:53Evan Raidt:And if you haven't tried automation with dollar cost averaging, whether that's in your regular brokerage account like Plink or a Roth IRA account, you need to do it. It's magical. And for a beginner, that's definitely the case. Now, I've had times in my life where I had a lump sum that was like half my net worth. And at that time, I was not comfortable because it was like a rollover. So at that time, I was not comfortable just lump summing it because it felt like a lot to me at the time. But you asked me 10 years later, is 50 % of your net worth in the lump sum, is that going to feel risky? I might have a completely different situation for you.

23:39Evan Raidt:So it's so dependent. When we start talking about percentages, you look like a billionaire's wealth, his 50 % and our 50 % is not trying to say it's not the same, but does your life change if 50 % of your net worth is knocked out? Probably. If we're talking about bigger amounts, maybe not, depending on your lifestyle. I don't know. Lifestyle comes into play. Your expenses come into play. Your psychology comes into play. If you have this mindset where I can't stomach losing $1 ,000,$100 ,000,$1 million, whatever the number is, it's very personal for everybody. There's a book called Richer, Wiser, Happier by William Green.

24:27Evan Raidt:And we've had him on the show years ago. And he talked about the book. It's a great book. I recommend picking it up. He did an interview with one of these investors. And he said, how do you manage your risk? And the investor said, I listen to my body. He says, when my body starts breaking down and basically my immune system or my back, I think he used his back was the example. When my back starts screaming at me and telling me like, hey, we have a problem. It's actually related to his risk management. And he's looked back over time and been like, wow, my back was actually really good at telling me when I was taking on too much risk.

25:06Evan Raidt:So that sounds super woo-woo and whatever, but consider it that your risk management matters a lot and your risk tolerance matters a lot. And that is whether you're talking about just regular personal finances or if you are a stock picker and you're managing millions of dollars and you have a big portfolio, the risk management and how you feel about it matters a lot. because if your back breaks, so to say, and you start getting really stressed out and you make a decision out of fear that would have actually, if you would have just stuck with it, would have been the big great unlock for your gains down the line.

25:48Evan Raidt:It's huge. It's huge. So don't discount the importance of your feelings about risk and how that affects investing returns because it does. It affects them a lot. And we've seen it from lots of people. you look at there's another study about most individual investors underperform the market because they're just bad market timers or they sell out when things are uncertain we've seen that with lots of people just try to learn from those mistakes and I think dollar cost averaging is a great substitute unless you have a good sense of your lump sum is is like a good feeling. You're not stressed about it.

26:34Evan Raidt:But what about you? I know you have good frameworks for lots of different situations that people can attach to. So how do you think about dollar cost averaging and lump sum?

26:44Andrew Sather:Yeah, I think that fear that you brought up, that's the biggest thing that I think everybody needs to stay away from. In a lot of places in your life, maybe your career or relationships, it's good to push your boundaries and push for sort of the unexpected or the unusual to grow as a person or grow in your career, grow your skill set, whatever it is. But when it comes to your finances, your finances are something that needs to be solid and needs to be there for you and be there to support you in your life or else you're not going to be able to pursue any of those kinds of things. And you're not going to be able to afford to take any emotional or career risk if you don't have a financial backbone to support you.

27:24Andrew Sather:And people make the worst decisions when they're in fight or flight mode. So if your finances are putting you in fight or flight mode and you're afraid of your finances, you're afraid of looking at it, you're afraid of the action you're about to take with your finances, that's when you're going to make the worst decisions. So for me, it's all about minimizing fear. Now that's going to change, like you said, drastically person to person. There are a lot of people out there that are comfortable taking big financial risks or somebody like a billionaire who has a ton of financial foundation beneath them that they know they can take a big risk on what to us is a massive amount of money that to them would not be life-changing.

28:02Andrew Sather:It would suck. They'd be very, very upset, but it would not be life-changing. It would not affect their ability to live or have a roof over their head or travel. It wouldn't change any of that. And so if the amount of money you're looking at investing doesn't have that large of a life impact on you and you don't feel a ton of fear with the idea of not entirely losing that money because realistically it's not going to go to zero but that amount of money turning into less than it is now if that scares the heck out of you then it's probably not worth taking on something higher risk like lump sum and it's probably better to do something like dollar cost averaging where you're going to take on a lot less risk you're going to you're going to have less ability to turn that money into a crazy amount of money than if you invested all at once but you're going to take on a lot less risk and feel a lot less fear.

28:49Andrew Sather:If you're somebody, however, that that doesn't really scare you that much, you know, for you, life is about a lot more than money and you know, you're going to have enough in the bank to support yourself afterwards. Then, you know, taking on that, that amount of risk could be okay. Cause you won't feel a ton of fear from it. You're, you know, your back isn't going to be throbbing because of it. You're not going to panic attacks because of it. Then you could be okay to, to be transparent about how I handle things, how I handle this personally. For me, any windfall or surprise amount of money, you know, inheritance, a bonus at work, you know, however else you just end up with a lump sum of cash.

29:24Andrew Sather:I am okay with lump sum investing that all at once. Not because I am a very, you know, risk tolerant person, but because I know that what I'm investing in, because I invest in the overall market, I talked about a ton, I use VOO, just an overall index fund stock for the stock market, I'm okay with putting a bunch of money into the overall stock market at once. Even though the overall stock market can fluctuate, absolutely, it's not going to fluctuate as crazily as a single stock would or a much smaller fund or something like that. So I know that I'm not taking on nearly as much risk as I would be in those situations, and I would rather just have that money in the market instead of letting a bunch of it sit and take, I don't know, maybe a year or whatever to get it all invested.

30:08Andrew Sather:I would rather just put it all in at once. Yes, I'm taking on some more risk, but I know I'm putting it into something that doesn't have a ton of risk inherently. Then anything else is always going to be dollar cost average. So if it's income, if it's, I don't know, smaller bonus or whatever it is, any smaller amount of money that comes in on a regular basis, I'm going to dollar cost average that. And I've always got that built into my budget. As we mentioned before, we have a free budgeting outline available online at einvestmentforbeginners.com slash budget. And that's a great starter tool for you to do.

30:39Andrew Sather:If you're looking to get into dollar cost averaging or investing in general, that's a great outline to do. But one thing that that's not going to help you with is lump sum. Lump sum is going to, is going to be a one-off situation. Maybe, you know, tracking something like your net worth will give you a good idea. Like Andrew was mentioning, if you know, okay, my net worth is a hundred grand and I just inherited 50 grand. Okay. That's, that's a large amount of money for you. And, and it may be a lot more risk and a lot more stressful for you to take on. If your net worth is 500 grand and you just inherited 10 grand, then maybe taking on more risk with that 10 grand isn't going to scare the heck out of you because it's, it's a smaller percentage of your, of your overall net worth and it's not going to scare you as much.

31:19Andrew Sather:But that's how I personally handle Andrew. How do you personally handle when, and if you lump sum versus dollar cost average?

31:26Evan Raidt:I'm, I'm in your camp, man. Like I like, I like that idea.

31:33Evan Raidt:if we're talking about massive lump sum I'll let you know if my thoughts change kind of a thing you just never know right but definitely having the dollar cost averaging should be an essential pillar in your budget and it will be we're talking about you know if I had 50 grand tomorrow how would that change my life you know lump sum dollar cost average, blah, blah. We could talk about that till the cows come home. I would argue that even that single decision, a big windfall for somebody, even like a 50 % net worth or something, would not have as big of an impact as the simple habit of dollar cost averaging and doing that over a long time period.

32:19Evan Raidt:Because what we're talking about is a sustainable habit that's going to change your life versus something that, yeah, might make an impact, but might not have the same... There is a power, and we could probably talk about it for days, but just the power of that habit of dollar cost averaging. And it really starts to level up if you increase that dollar cost averaging as you become more and more wealthy, as your income increases and you're ratcheting up that dollar cost averaging. Maybe that's a kind of compound calculator we could make. Like that's, someone should make an app for that. You know, how big does the snowball get if you're increasing it by 10 % a year, like how much you're putting in?

33:05Evan Raidt:That could be really nice too. So I'm all about the dollar cost averaging 100 % do that with your income. And I was less on the lump sum when I was first starting in my journey. I'm all about it now. Like I'm down, like let's go. But to your point, I have that foundation now that I've been dollar cost averaging for 12 years. So that allows you other options. So I highly recommend dollar cost averaging as soon as possible.

33:36Andrew Sather:Yeah, maybe a compound interest calculator that could also manage your credit cards and your Apple Walls.

33:41Evan Raidt:Yeah, there you go.

33:42Andrew Sather:Massive app idea. Oh, credit card rewards, right? Yeah, also rewards feed into your Apple. Yes, absolutely. I think that's actually a really, really good point that the short-term effect that something like starting dollar cost averaging is going to have is always going to be smaller than something like a lump sum. And so, yeah, especially when you're getting started and you don't understand as much about the market, you don't have as much experience opening an app and seeing a red chart pop up up front to say, hey, your money's gone down today. You've lost money today until you get used to that.

34:19Andrew Sather:And you're comfortable seeing that and understand that that's not the end all be all. That's not the long-term return. That's not any of those kinds of things until you're comfortable with that. When you get started, something like dollar cost averaging is, is easily the best place to go. And, and it's always great to manage those, those emotions up front. Um, because I would also argue that even if you are the person that now at this current moment is comfortable lump sum investing, like you, Andrew, you're, you're comfortable with that. because you understand how the market works. You've had experience, blah, blah, blah.

34:48Andrew Sather:Like you said, 12 years ago, and whoever else is out there that's listening, who's currently comfortable with that, I guarantee upfront when you were first learning about the stock market or made your first investment, the idea of lump sum investing was scary as crap and you would never want to do it. And you probably thought you would never want to do it at any point in the future because that's a crazy amount of risk to put into something that you think is just, you know, a bunch of meaningless, ethereal BS. and until you understand it and you've lived it and you've earned money from it over the long run, you're not going to be comfortable doing any of those kinds of things.

35:23Andrew Sather:So I guess I got one last question for you. You called out Value Spotlight earlier as an investment portfolio that you manage. How do you handle inside Value Spotlight lump sum versus dollar cost averaging investing?

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36:16Evan Raidt:You log in and everything is right there in the dashboard. It's clean, saves time, saves energy, and helps you do the things that matter. Take back control of your business today. Open a Found account for free at found.com. That's F-O-U-N-D dot com. Found is a financial technology company, not a bank. Banking services are provided by LeadBank, member FDIC. Join the hundreds of thousands who've already streamlined their finances with Found. Mom, can you tell me a story? Sure. Once upon a time, a mom needed a new car. Was she brave? She was tired, mostly. But she went to Carvana.com and found a great car at a great price.

36:53Evan Raidt:No secret treasure map required. Did you have to find a dragon? Nope. She bought it 100 % online. From her bed, actually. Was it scary? Honey, it was as unscary as car buying could be. Did the car have a sunroof? It did, actually. Okay, good story. Car buying you'll want to tell stories about. Buy your car today on... Carvana. Delivery fees may apply. Yeah, dollar cost averaging. See, I can't help myself, but those words just like spill out of my mouth. Like, I just can't say them enough. First words. Google got dollar cost averaging. That's funny. I got something for my son who's going to be here soon.

37:30Evan Raidt:All right. I'll work on that. I'll report to you guys.

37:33Andrew Sather:Yeah. First words. That would be huge. The biggest investor brag in the world.

37:41Evan Raidt:Okay. So value spotlight. 12 years ago, I started this newsletter and the whole idea was I want to show that you can do a lot with a little. So it's a real money portfolio. It's a Roth IRA account. I have split into two, but I consolidate into one. That's another story for another day. But$150 a month to prove it could make it$2 million. And the compound interest calculator says 11 % returns gets it$2 million. So probably the longest journey, because it's like watching paint dry of this portfolio just slowly compounding. And so because of the nature of that, I don't lump some into it because the whole mission is$150 a month to make it to a million.

38:32Evan Raidt:So that journey is still in progress. You can follow along if you want. It is like watching paint dry, but it's crazy how you're tracking it, you're tracking it, you're tracking it. I don't know if you've seen this similarly with your own net worth, but you're putting in the numbers every month. that you kind of just do it on autopilot, and then just one day randomly three years later, you're like, oh, wow. This thing is bigger than it was. And how did that happen? I don't know. I wasn't even paying attention. I don't know if that's something that you've seen with your net worth or not, but that's something I've observed with Value Spotlight.

39:14Andrew Sather:Yeah, it starts to get to a point. I mean, you were kind of going on before about how beautiful dollar cost averaging to be in the long run. But yeah, it reaches a point where you're like that it's bigger than it should be. And I'm not talking about it's double, you know, what it should be at this point. Eventually, of course it will be, but at this point, it's not like I'm looking at it and it's like, Oh, I'm twice as rich as I thought it was. That's not what's happening, but it is just, it's larger numbers than it should be. It's increasing at a faster rate than it feels like it should be just because all of the returns that you generated last year are now helping you generate even more returns this year and will help you generate even more returns next year.

39:51Andrew Sather:And that long-term magic of that paint drying into money or whatever the process is, is, is absolutely fantastic and beautiful to see and very, very supportive of your financial future. Um, and a great thing about it for me, because I am somebody that if I were to take on a ton of financial risk, like say I invested a lump sum that I inherited or whatever, all into an individual stock or, you know, into swing trading or some, something that's a lot riskier. I am somebody that would feel that risk outside of investing. I am somebody that, you know, my back would start to hurt. I would have panic attacks.

40:26Andrew Sather:I wouldn't be hungry. You know, I would emotionally be a wreck from taking on that level of risk. But I just don't feel that way from dollar cost averaging. I invest every single week at this point. I've done that for many years and I just don't feel any stress from it whatsoever. Even when I open the app and see red because I've opened the app and seen green many times. And I've looked at the long-term numbers. And like we're talking about, I've just seen myself grow more money than I should have. And all it takes is just taking the time and effort to set that up and do it and build that habit.

40:59Andrew Sather:And that is a beautiful, beautiful habit to build that just doesn't cause me any stress. And that was one of my favorite things about doing it.

41:07Evan Raidt:I love that. Yeah. And it's cool to hear it too in your voice. you're walking it and it's a great example and very motivating for me personally to hear and I hope it's motivating for others out there. Can I leave us with like a math thing or is that just completely Do I need a pen and paper? No, no. And a TI-84?

41:33Evan Raidt:My daughter's school is asking people to donate their TI-84s. I don't even know why. Everybody wants them, man. I don't know.

41:41Andrew Sather:I mean, I guess... You want one? You don't have one. I've got one. Are you kidding me? I've got it at work.

41:47Evan Raidt:Oh, okay. All right. All right. Well, if you weren't at work, I think you'd be young enough to not have one. That's fair. That's fair. I'm going to just do it. Whether you guys like it or not, I'm going to drag you through this math problem. Through homework? All right. One of the sayings that Charlie Munger used to say, Charlie Munger, business partner Warren Buffett, billionaire himself as well. you always say the first hundred thousand is the hardest. Think about this for a second. Say you have 50 grand. What is 50 grand? What happens if you double 50 grand? How much do you have? 100 grand.

42:25Evan Raidt:100 grand. Good. Now, what if you earn 50 % on that 100 grand? How much do you have? 150 grand. 150 grand. That's a triple from what you had at 50 grand. Weird, right? The compounding of once you've doubled the money, you don't have to double it again to triple or quadruple. To triple it, you just have to earn 50 % on it. So that's the math behind compounding. Your snowball doesn't need much more once it's gotten bigger. And those numbers just start to get ridiculous. So if you can get to the 100 grand, the numbers really start to get magical.

43:08Andrew Sather:yeah going to 100 and that even though you know most of us aren't earning 50 in the stock market the numbers work out just the same even for lower returns you know something like 10 returns is going to behave behave exactly the same just to a to a less severe degree um yeah the longer you let that snowball ride and the bigger it gets it's going to get so much easier like you know if you started investing today you started dollar cost averaging today or lump sum what you had then started dollar-cruis-affering, whatever it is, 20 years from now, that snowball, even if you didn't change how much you're investing on a weekly, monthly basis, would be growing so much more quickly than it ever was before.

43:45Andrew Sather:And it's only going to grow more and more quickly. And then like you mentioned, you keep ratcheting that up of investing more as you earn more, or as your expenses decrease, whatever you can change in your life, it's just going to ratchet up faster and faster and freaking faster. And that's the kind of train you want to be on. So I hope that was helpful for some people out there. So to kind of summarize from the title of this episode, dollar cost averaging is absolutely not losing you money. It's absolutely not. However, there are definitely some situations out there where taking into account lump sum as an option could definitely be really good for you, really beneficial for your finances.

44:22Andrew Sather:And if you're somebody that can emotionally handle it, then it could be really, really good for your life and your financial future. So I really hope that helps some people. As always, if you have any questions or you want to email me at evan.einvestingforbeginners.com. I'd love to hear how you invest, whether you use dollar cost averaging and lump sum or just one or the other. You know, are you a massive risk taker or are you somebody that just wants this to be an easy, breezy, beautiful ride and that's all you want from it. As we mentioned before, also we have a free budgeting calculator available online at einvestingforbeginners.com slash budget.

44:54Andrew Sather:Really free, super easy tool to use to just to get started. And remember, financial freedom is built one smart move at a time. Keep it simple. Keep it steady. And at any rate, I'll see you next time. Peace. The information contained is for general information and educational purposes only. It is not intended for a substitute for legal, commercial, and or financial advice from a licensed professional. Review our full disclaimer at einvestingforbeginners.com.

45:29Evan Raidt:looking to upgrade your stock portfolio if you are a regular listener of investing for beginners then i have a great podcast to add to your rotation my name is brett schaefer co-host of chit chat stocks a podcast helping you find your next great investment on this show we study businesses interview best investing experts and riff on weekly market commentary whether looking for new stocks to buy or simply a fun weekly listen covering the stock market, we have episodes that you will enjoy. Discover new stocks and upgrade your investing game by following Chit Chat Stocks today on Spotify, Apple, or wherever you get your podcasts.