Dollar-Cost Averaging: A Simple Way to Beat the ‘Experts’ and Build Wealth Over Time

Summary and introduction:

Research shows that the majority of investors underperform the broad market indices. The most likely reason is due to frequent buying/selling and behavioral mistakes. When you are trying to “outsmart” the markets, you most likely end up losing to the market.

To successfully invest you actually need to do as little as possible. What is required of you is more or less nothing. No analysis, no research, no forecast, no reading of news and research, no tinkering and no re-balancing. No intelligence whatsoever is required. No study of Warren Buffett or other marvelous investors (which you will never manage to clone anyway).

What you need to do is the following:

Set up an automatic monthly withdrawal from your bank account to buy shares or units in passive mutual funds or ETFs (or several funds/ETS, perhaps some active funds as well). Then forget about it and continue your ordinary life. Don’t do any tinkering. This method is called dollar-cost averaging (DCA). It can’t get any simpler than that! If you do that for 2-4 decades you most likely build a decent wealth and crush the majority of the “experts” along the way.

At the end of the article, we give you an example of how to dollar-cost average. Even saving only 100 a month gets you a long way if you are patient and let your capital compound.

Warren Buffett has always advised “unprofessional” investors to simply invest in the S&P 500 index (or another passive index). That is cheap and easy and gives you the same return as the index minus a small cost. This advice makes a lot of sense, but of course, is rather boring for a lot of aspiring investors.

When you retire you simply do the opposite: withdraw a certain amount or percentage every month from your assets. Don’t waste your time looking for dividend stocks to pay for your retirement. Most dividend investors have it all wrong.

All you need is a steady job/income, time and delayed gratification. DGA is the hardcore version of Charlie Munger’s “sit on your ass” investing.

Pessimism and opportunity costs: It pays off to be an optimist in the stock market

Mainstream and social media bombard us constantly with news, commentaries and opinions about the stock market and the economy. At any time there are a zillion reasons for the stock market to drop x%, and very often you need a leap of faith to hang on to your stocks. Reading about the markets at regular intervals makes it just worse.

Being bearish is a huge opportunity cost in the long run. Dimson, Marsh and Staunton published in 2001 a brilliant book called Triumph Of The Optimists that elegantly shows the superior returns in stocks versus other asset classes. Optimism is an underrated asset, given of course you can control your emotions. You just have to tolerate some potential pain when the market drops, but this of course you avoid by ignoring the news and not following your positions.

The less time you spend on calculating your assets, the better. Just make sure you have a daily margin of safety to continue your ordinary life, and your wealth will highly likely take care of itself.

Most stocks do poorly – stick to mutual funds:

Statistics show that most stocks perform very poorly. According to the famous study by Hendrik Bessembinder the median stock “survives” only seven years, and only 27.6% of the listed stocks manage to beat treasury bills. Thus, the median stocks have returned less than treasury bills even though the averages have performed so well (read here for an explanation of averages and median).

How are you going to pick those few good stocks? It’s extremely unlikely. Research shows small retail investors underperform both the market and mutual funds. By investing directly in the stock market you highly likely fail and end up trailing the market averages.

Then how come the stock market has been such a good asset class over time?

The outliers make the averages perform well:

A very small group of stocks make the stock market outperform: the outliers. The above-mentioned book by Elroy, Dimson and Marsh didnR