One reader had these thoughts to see if he could combine DCA with trend tracking:
What are your thoughts on dollar cost averaging (DCA)? The traditional concept, such as contributing to an IRA monthly or quarterly, or regularly to a 401K at work, is a good way to save/invest. To get the most benefit of DCA, the most volatile fund should be used, to buy more shares on the downswings. (A fund with no volatility, such as a money market, looses this advantage.)
However, how should this be managed with sell stops and TTI trend exits? The DCA concept is to keep investing through market downturns.
How should DCA be incorporated into your plan?
I’ve never been a friend of dollar cost averaging since the issues I have with it are not much different than those with buy-and-hold.
To be clear, I use a form of dollar cost averaging after the markets have generated a buy signal to move into equities via my incremental buying process. So I try to average in on the way up (not on the way down), when momentum supports my decision.
Take a look back at 2008. Using DCA, you would have purchased incrementally more shares as asset prices declined. These purchases at lower prices will show some gains during this recent rally. However, the bulk of your assets, which you had accumulated prior to the crash, took a big hit.
DCA may get you in the market at lower prices from time to time, but it will not prevent your portfolio from getting slaughtered during a major market decline. If you have incremental money to invest, do so during bullish periods only and track your sell stops as recommended.
Comments 4
DCA or not, you have to have 10% stop for every fund in portfolio. Also keep watch on 'Total value of portfolio' if it is going down.
DCA is for lazy investor, who dont want to take slightest trouble to read prospects(which company prints and sends is 3 month old stale useless trash anyway)
Just ask your fund manager one question. What will be my historical gain/loss if I 'MISS 10 WORST DAYS' in stock market in last 30-40 yrs. You will be surprised to find answers and I bet you will never try DCA(or listen to your MF manager) again.
I have found out the hard way that the merits of DCA are grossly overstated. Without starting any conspiracy theories here, it is a tool for asset managers to "guarantee" inflows into their mutual funds.
Even in my 401K, I do NOT automatically invest in any of the choices available and go to cash. I – and ONLY I – decide which fund to invest in when, how much, and how fast.
Vintage,
I agree. Contributions to 401k accounts should always go to cash first and then allocated in a lump sum as per market conditions.
Ulli…
I am not a user of DCA nor would I recommend it. However, one should have all his facts straight before coming to any conclusions.
Here is the most interesting fact regarding DCA that I have ever come across, this should surprise some people:
If you had begun investing in the 30 stocks of the Dow just before the Crash of 1929, and you allocated exactly $15.00/month for the next 20 years, as the infamous John J. Raskob recommended in the Ladies' Home Journal, 1929 to 1948, you would have realized a compounded annual return of better than 8%.
That's right, and that's not bad is it? And it is even more surprising when you consider that when you started this plan the Dow was at 300 and at the end of 20 years that same Dow was at 177.
Just another angle to consider.
G.H.