The biggest market crash that ever took

place was in 1929 when the market

dropped by 89.2%

Just for comparison, in 1999 during the

dot-com bubble, the market dropped by

78%.

In the 2008 crisis, the market dropped

by 54.1%.

So, it's not hard to see that 1929 is

the biggest crash ever to take place in

US history.

Now, imagine you are dropped in the year

1920 and you have to invest in the US

stock market for the next 40 years. You

have two investment strategies to choose

from. Number one, dollar cost averaging

DCA. You invest $100 every month for all

40 years. Number two, buy the dip. You

save $100 each month and only buy when

the market is in a dip. Such as during

the 1929 dip. But, I am going to make

the second strategy even better. Not

only will you buy the dip, but you will

also have god-like powers. This means

you will know exactly when the market is

at the absolute bottom. This will ensure

that when you do buy the dip, it is

always at the lowest possible price. So,

which strategy would you choose?

DCA, dollar cost averaging, or buy the

dip?

Logically, it seems like buy the dip

can't lose. However, if you actually run

the simulation, you will see that DCA,

dollar cost averaging, outperforms buy

the dip over 70% of the time.

This is true despite the fact that you

know exactly when the market will hit a

bottom.

As you can see from the graph, when buy

the dip ends up with more money than

dollar cost averaging, it is above the

0% line. And when it ends with less

money than dollar cost averaging, it is

below the 0% line. What you will notice

is that buy the dip does quite well

starting in the 1920s due to the severe

market crash. However, it stopped doing

well after the 1930s.

As you can see from the graph, over 70%

of the time, the line is below the 0%

line, which means buy the dip

underperforms dollar cost averaging 70%

of the time, despite the god-like

timing.

What makes the buy the dip strategy even

more problematic is that we have so far

assumed that you would precisely know

when you are at a market bottom. But in

reality, there is no single person on

this planet who can do that.

For example, if you miss the bottom by

just two months, the success rate of

dollar cost averaging over buy the dip

will increase from 70% to 97%.

So even if you are somewhat decent at

calling bottoms, you would still lose in

the long run.

If you attempt to build up cash and buy

at the next bottom, you will likely be

worse off than if you had bought every

month. Why? Because while you wait for

the next dip, the market is likely to

keep rising and leave you behind.

Another problem with buying the dip is

that you are very unlikely to invest

when the market is crashing and everyone

is panicking. But which investment

strategy should I choose? Should I just

invest all my money at once right now,

or spread it over one or two years?

To find an answer, let's do one more

thought experiment. Imagine you have

been gifted with $1 million

and you need to invest it. You can only

undertake one of two possible investment

strategies. You must either invest all

your cash now, we'll call this option

lump sum LS,

invest 1% of your cash each year for the

next 100 years, and we call this option

dollar cost averaging DCA.

Which one would you prefer?

If you assume that the assets you are

investing in will increase in value over

time, then it should be clear that

buying now will be better than averaging

in over 100 years.

Waiting a century to get invested will

not be kind to your purchasing power.

We can take this same logic and

generalize it downward to periods much

smaller than 100 years.

Because if you wouldn't wait 100 years

to get invested, then you shouldn't wait

100 months or even 100 weeks either.

For example, let's say you have 12 grand

and again, you need to invest it in one

of those two options above.

With lump sum LS, you invest the

$12,000, all your funds, in the first

month. But your dollar cost averaging

DCA, you only invest $1,000 in the first

month and hold the remaining $11,000 in

cash to be invested in equal sized

payments of $1,000 over the next 11

months.

Visually, it would look something like

this.

Now, let's go back to history and run a

simulation to find out which one of

these investment strategies would

perform better over a 24-month period

starting from 1960

until 2018.

Graphically, it would look like this.

When the black chart is below the 0%

line, these are periods where dollar

cost averaging under performs the lump

sum strategy. And when it is above it,

it outperforms.

If you notice, most of the time the

chart is below the 0% line.

Visually, it's pretty clear that lump

sum outperforms most of the time. But if

you are not yet convinced that lump sum

strategy beats the dollar cost

averaging, we can extend the time period

and run the simulation starting from

1920 until 2018. Visually, it would look

like this.

And in terms of numbers, lump sum beats

dollar cost averaging 68% of the time

even in such a long time horizon.

What about assets other than stocks?

Rather than bury you in chart after

chart showing lump sum's superior

performance, I can shortly say that

results are quite similar to the one we

just described above.

Even in multiple asset classes, LS

outperforms DCA the majority of the

time.

So, to summarize quickly, number one,

as a long-term investor, you are better

off if you just start investing right

away instead of waiting for the crash to

happen.

Number two, lump sum is a better

investment strategy across different

asset classes and the majority of the

time. It underperforms when investing

right before crashes, but over a long

period of time, it recovers.

Here's another question you might ask.

Were you personally convinced by the

author's arguments and would you invest

in the stock market right now?

Here's my opinion. All the numbers and

data made sense, but I was still not

sure.

I was fully convinced after reading the

following reasoning.

When you invest in a diversified basket

of funds, such as the Vanguard FTSE

All-World, which by the way includes

over 4,115

companies all over the globe, then you

are basically investing in the future of

humanity.

You're simply saying, I believe after 10

or 20 years, humanity is going to be

more developed than today.

For example, in the 20th century,

humanity faced not just one, but two

world wars, a cold war, and multiple

market crashes, but despite all that,

humanity kept going.

I don't know you,

but I am still positive about the future

of humanity.

This was the reason, when combined with

all the historical data,

I was convinced.

This is it for this video. If you would

like to see more book summaries, check

out the playlist that you see on your

screen. Have a nice day.