Lump Sum vs. Dollar Cost Averaging with Mortgage Offset

Hi all,

Something has been bugging me about the whole lump sum vs DCA argument - it is typically a shares vs cash approach. I thought I'd have a look and see how using a PPOR mortgage offset account instead of cash would affect the results. This is something I put together pretty quickly so please DYOR as I am not saying it is 100% bulletproof. It also doesn't include taxes, investment fees etc.

$100k invested either up front or equally distributed over 5yrs. Investment is 50/50 ASX accumulation index/US total stock market. Out of market index is the Australian Basic Variable Home Loan index rate for owner occupiers from the RBA. ASX accumulation index data is from marketindex.com. The links to the portfoliovisualizer Monte Carlo simulations are in the headings to have a look for yourself. Constrained to 1999 onwards because of the home loan data.

Lump Sum Investment

Lump Sum Outcomes by Ross36 posted 7th Oct, 2019 at 12:18 PM

Lump Sum Histogram by Ross36 posted 7th Oct, 2019 at 12:16 PM

Dollar Cost Averaging

DCA Outcomes by Ross36 posted 7th Oct, 2019 at 12:17 PM

DCA Histogram by Ross36 posted 7th Oct, 2019 at 12:16 PM

This has made me firmer in my belief that DCA is a good idea for a lump sum if you have concerns about losing money and doing something stupid / explaining it to your partner! The median return is lower for the DCA but not by a whole lot and given the limitation to the downside risks you can make a strong case for it. Of course the upside is limited to, but as psychology tells us that missing out on larger gains when you already have very good ones is less impactful than large losses.

There are limitations to this analysis that could swing the pendulum either way. No taxes is one of the biggest ones, as it assumes there is not tax on the share investments and therefore no more to pay (high tax bracket) or receive (low tax bracket - franking credits). Importantly though there is no inclusion of potential investment rules with the DCA method, for example every time the market drops 20% then bring forward one years investment / drawdown additional funds from the loan available because of the offset reductions etc. These rules might supercharge the returns of the DCA method.

Of course we are at a low in interest rates over this period so currently the offset is returning less than it's historical levels which are 5.90% for this period. Whether that lasts over the next 5 years is beyond my ability to predict. We are also amidst a long-term bull run in shares so whether that lasts 5 years is also beyond my ability to predict. This 20 year simulation period also includes 2 major crashes in the US index which may negatively impact the share returns, however the roughly 8% average annual return from the US/Aus combo seems about right.

I just wanted to post this in large part for my own records - whenever I question my strategy I can refer back to it! - and to get others thoughts/opinions.

 

You wouldn't want to be investing using cash in an offset on the main residence. You would be throwing money away.

You would want to split, pay down the split and borrow to invest so you can get extra tax deductions without paying any extra interest. i.e. debt recycling.

 

Definitely. Those tax considerations were beyond the scope of what I was looking at. There's many different ways this could work but the essence of DCA using offset vs lump sum is there. Obviously individuals need to consider their own factors.