Dollar Cost averaging

[tmvijai]

A smart way to invest in the market to make the best of worst and best times as per many analyst. What do you think about it?

Do you think dollar cost averaging really reaps rewards in longer run or just yet another strategy to pull people into investing?

[disneysteve]

I'm a believer. I think DCA puts investing on auto-pilot and prevents people from buying high during boom times and panicking and selling low in corrections.

[boosami]

I agree as well. It's a great set-it-and-forget-it strategy.

[Broken Arrow]

Sort of got into this one with someone elsewhere, but he believed in market timing, so....

Honestly? I think it's one of the easiest ways to invest, and in some occasions such as contributing a 401(k), it's also the only practical way to do it.

DCA can and does work, as the strategy is to simply keep investing, regardless of the irrationalities and volatility of the market. And please remember that it's not just meant for the stock market either. Depending on what we pick, are also investing into the bond market and anything else for that matter.

[shultice24]

Originally Posted by disneysteve

I'm a believer. I think DCA puts investing on auto-pilot and prevents people from buying high during boom times and panicking and selling low in corrections.

I'm with Disney. It essentially forces you to buy stocks like you would breakfast cereal, for example. When cereal is overpriced, you likely will hold off. But when it's being sold for a dime a dozen, you back the truck up. Ironically, few investors practice this same behavior when it comes to stocks- DCA ensures that you do.

[shultice24]

Make sure you actively consider what you are DCAing into though. It certainly isn't foolproof if the investment is crap. It doesn't matter that you're buying shares at rock bottom prices if the company is doomed to bankruptcy or a cheap takeover bid.

[tripods68]

Dollar Cost Averaging is the best strategy you can employ to reach your retirement goal. The key is to be consistent no matter what.

[ea1776]

IMHO, the days of "buy and hold" as a successful strategy are over. Of course financial institutions are going to "educate" people about the benefits of DCA. The more people invested in funds, the higher their profits. You think they'd "educate" people about stock exit strategies? Heck no! But cutting losses short would have saved people a bundle. Instead, folks will have to wait 10 years or more to regain what has been lost in some cases. Of course, your portfolio will have less gains during a bull market with the cut-losses-short approach, but you'll come out ahead in the long run since you won't have to spend tons of time coming back from devestating losses.

On the other hand, DCA probably is the best way to buy stocks IF you believe in buy-and-hold (which I don't) and have no interest/time/inclination in investing. In other words, I think this approach is a couple steps better than not investing in stocks at all, but far from the best stock-investing approach.

[am_vanquish]

Originally Posted by ea1776

IMHO, the days of "buy and hold" as a successful strategy are over. Of course financial institutions are going to "educate" people about the benefits of DCA. The more people invested in funds, the higher their profits. You think they'd "educate" people about stock exit strategies? Heck no! But cutting losses short would have saved people a bundle. Instead, folks will have to wait 10 years or more to regain what has been lost in some cases. Of course, your portfolio will have less gains during a bull market with the cut-losses-short approach, but you'll come out ahead in the long run since you won't have to spend tons of time coming back from devestating losses.

On the other hand, DCA probably is the best way to buy stocks IF you believe in buy-and-hold (which I don't) and have no interest/time/inclination in investing. In other words, I think this approach is a couple steps better than not investing in stocks at all, but far from the best stock-investing approach.

I'd argue that there's a fine difference here between trading stocks & investing, and that your argument is incorrectly being applied to both. Yeah, in terms of stock trading, you're right that no one really preached "stock exit strategies." However, in terms of long-term investing(ESPECIALLY for retirement) it seems that there was plenty of education regarding asset allocation and how risk exposure should decrease as one approaches retirement. Implicit in that education on asset allocation is the duration issue. To me, there was PLENTY of forewarning for those approaching retirement that if they wanted to protect the money they've accumulated so that it's safe within the next 10 years, they shouldn't have been in equities. In that sense, I don't think you can say that anyone was preaching buy-and-hold for long-term investing.

[disneysteve]

Originally Posted by ea1776

But cutting losses short would have saved people a bundle.

That's true, but since market timing is impossible, how would anyone have known when to sell? And then, when things looked bleakest back in March and lost of people were bailing out of the market, how many people who don't do DCA were actively buying. I know I was because I buy every month and have been doing so since 1992. As a result, I've already regained a big chunk of what I had lost. And overall, thanks to DCA, my long-term performance isn't all that bad because buying consistently over time smooths out the ups and downs of the market.

[ea1776]

Originally Posted by disneysteve

That's true, but since market timing is impossible, how would anyone have known when to sell?

Exact market timing is impossible, HOWEVER when you see huge high volume selling and a way overvalued (historical-wise) market, that is a good indication to get out of stocks. For example, the dot-com bust, when some companies are selling at 70x earnings without the earnings growth to back that up, why would you keep DCA'ing into stocks at that point if you notice huge institutional sell-offs on the chart (and for that matter why would you keep your holdings)? Price/volume action on a chart tells you what the big guys are doing. And what the big guys are doing is the largest contributor to price movement.

Again, I'm not saying DCA'ing isn't a good "set it and forget it" strategy; I'm saying "set it and forget it" is not the best approach to investing IMHO. Of course, the folks collecting the juice on your mutual funds' expense ratios might have a different story to tell...

[disneysteve]

Originally Posted by ea1776

why would you keep DCA'ing into stocks at that point if you notice huge institutional sell-offs

If there are huge institutional sell-offs happening, chances are the mutual fund managers are among the sellers. If I'm dollar-cost-averaging into a mutual fund, that is not the same as if I was dollar-cost-averaging into an individual stock. The money going into my funds today is not buying the same basket of stocks that it was buying 6 months or 1 year or 5 years ago.

[tmvijai]

I am a fan of DCA but I do hear other sides where DCA is just a myth. I hear from my local 1110AM biz radio station host Dan. It doesn't really work. Check out this article InvestingMinds Articles » Archive » The Myth of Dollar Cost Averaging which also talks about it..

[Broken Arrow]

Funny, that's similar to what I ran into elsewhere....

For one thing, not all expense ratios are created equal. Some charge a lot. Some don't. Vanguard's retirement funds are typically 0.19%. That's $190 a year for every $100,000 invested with them. And that's before Admiral Share! Come on, $190 to take care of $100k of your retirement money? It's not really all that bad is it?

Exit strategies involves a gradual shift in asset allocation, but the point here is that, even when you are retired, your money has to last well into retirement. So, even at age 65, if you are in good health and plan on having your money around for the next decade or two (or three), then you still have to have some money invested in growth-related asset classes. And generally speaking, growth mean stocks! Yes, stocks at age 65! Unless you retire with a huge balance, fixed income asset classes won't be enough.

DCA gets a bad rap because of the recession and people only look at the stock market, but that's not entirely fair. As I have mentioned earlier, a diversified portfolio should also involve other non-correlated asset classes, such as bonds, but also commodities, REITs, and even precious metals and futures if you so desire. Not everything is purely stock-related, so how come the stock market is getting such a bad rap when people should also be DCA-ing into bond funds?

And as far as I know, DCA is only recently getting a bad rap, because of the stock market drop that started back in 2008. Seriously, are we going to blame something as simple as DCA based solely on one year's performance? Because I can think of plenty of other things to blame other than DCA.

To me, saying DCA is like saying, "Honda Civic" or "Toyota Corolla". Can you find a better vehicle to drive your portfolio? Sure, but I assure you it's well past the point of diminishing returns. And just like a Civic or a Corolla, the more one learns about market conditions and investing in general, the more one will realize how generally effective they are, even if they seem so deceptively simple on the surface.

In that same respect, I'm also perplexed as to why people are crucifying DCA. It's like blaming the tides for being too high or low, all the while ignoring the moon. Why would you do that? How about Americans over-consuming and not saving enough for retirement? How about buying too much house, and then using second mortgates and HELOCs as free money to spend on vacations and stuff they don't need? Isn't that a bigger issue?

[ea1776]

Originally Posted by am_vanquish

I'd argue that there's a fine difference here between trading stocks & investing, and that your argument is incorrectly being applied to both. Yeah, in terms of stock trading, you're right that no one really preached "stock exit strategies." However, in terms of long-term investing(ESPECIALLY for retirement) it seems that there was plenty of education regarding asset allocation and how risk exposure should decrease as one approaches retirement. Implicit in that education on asset allocation is the duration issue. To me, there was PLENTY of forewarning for those approaching retirement that if they wanted to protect the money they've accumulated so that it's safe within the next 10 years, they shouldn't have been in equities. In that sense, I don't think you can say that anyone was preaching buy-and-hold for long-term investing.

You are missing my point. Yes, there is some education about reducing exposure to stocks. But that education revolves around when the INVESTOR is "ready" for reduced stock exposure (i.e. approaching retirement). I've never seen mainstream educating revolving around learning when the MARKET is ready for a correction, or for that matter when it is ready for a rally. Point is, mainstream education is always going to revolve around BUYING something. In your example (addressing the need for reduced stock exposure as one nears retirement), that something might be a target retirement fund. I read somewhere on here that a 2010 retirement fund lost 25% in this last market correction. I suppose that investors relying on that fund, in retrospect might have preferred a more hands-on approach to retirement investing...

At any rate, you'll never hear mainstream education preaching about building up cash reserves, but that's exactly what many successful independent investors do.

[ea1776]

Originally Posted by disneysteve

If there are huge institutional sell-offs happening, chances are the mutual fund managers are among the sellers. If I'm dollar-cost-averaging into a mutual fund, that is not the same as if I was dollar-cost-averaging into an individual stock. The money going into my funds today is not buying the same basket of stocks that it was buying 6 months or 1 year or 5 years ago.

True, but you are still buying stocks is my point. Not all huge institutional investors are fully invested in the stock market at all times.

[disneysteve]

Originally Posted by Broken Arrow

DCA gets a bad rap because of the recession

This is really ironic. When stocks were only going up, folks were all in favor of DCA. When prices started dropping, people started questioning the value of DCA. That makes no sense at all. When prices are only going up, DCA is actually a lousy strategy. I had that thought often. One month, I sent in money and bought shares at $85. The next month, it was $86.50. The month after that it was $87.95. I would have been better off dumping the money in all at once.

The benefit of DCA comes when the price drops and you get to snatch up more shares for your money. The lower the price goes, the more shares your money buys. Eventually, when the market turns around and prices start climbing again, you are in much better shape to benefit from the recovery. It works just fine. I've seen it in my own portfolio this past year.

You have to remember that DCA is a long-term strategy. You can't look at short-term results (in highly unusual market conditions) and throw out a perfectly good long-term plan as a result.

[ea1776]

Originally Posted by Broken Arrow

Funny, that's similar to what I ran into elsewhere....

For one thing, not all expense ratios are created equal. Some charge a lot. Some don't. Vanguard's retirement funds are typically 0.19%. That's $190 a year for every $100,000 invested with them. And that's before Admiral Share! Come on, $190 to take care of $100k of your retirement money? It's not really all that bad is it?

FWIW, my point was not that funds are expensive, but rather that the people running the funds want you to DCA b/c that's how they get paid. Obviously, they'd want you to buy managed funds over indexed, but investors buying anything is better than investors raising cash to them.

[disneysteve]

Originally Posted by ea1776

True, but you are still buying stocks is my point. Not all huge institutional investors are fully invested in the stock market at all times.

I disagree. My overall portfolio is not all stocks. As BA pointed out, DCA is not just about stocks or stock mutual funds. We DCA into bonds. We DCA into a REIT. We DCA into a gold and precious metals fund. You could even say we DCA into cash accounts since interest rates fluctuate. A CD purchased 6 months ago is earning a different amount than one bought today.

Also, even within a stock mutual fund, the fund has a certain percentage of assets in cash and that percentage fluctuates based on market conditions. If the manager feels the market is overvalued, he may cut back the stock holdings and boost the cash reserves, so the money I'm sending in each month may actually be increasing my own cash exposure as a result.

[disneysteve]

Originally Posted by ea1776

the people running the funds want you to DCA b/c that's how they get paid.

And stock brokers would like you to invest on your own because that's how they get paid. No matter how you do it, somebody makes money off of your business.

When you think about it, the mutual fund managers have more incentive to help you make money because they get a percentage of assets under management. If your account grows in value, they get more money. A stock broker only gets a commission when you buy and when you sell. It doesn't matter to them if the stock goes up or down and they don't want you to buy and hold. They want you to trade more frequently. I'd rather deal with the fund manager who has an incentive for me to do well.