hoops902
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Post by hoops902 on Feb 11, 2011 15:11:46 GMT -5
"We want to maximize our returns subject to an acceptable variability in our investment choices; generally the higher the risk, the higher the reward. But now we are speaking of choice of investment(s), not DCA."
DCA contributes to decreasing variability in regard to pricing which makes it directly relevant when bringing in the idea of maximizing returns regarding a specified variance.
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runewell
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Post by runewell on Feb 11, 2011 15:17:09 GMT -5
The badmoneyadivce link CA put up makes an important point: people often make emotional decisions about our money even when they are suboptimal. It suggests that people DCA for that reason, they think it is somehow better or they are afraid to put all there money in the market, even though long-term it may be more beneficial to invest it all right away.
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runewell
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Post by runewell on Feb 11, 2011 15:35:39 GMT -5
According to Wikipedia:
"theoretical analysis of the strategy have shown that in addition to having the admitted lower overall returns, DCA does not meaningfully reduce risk when compared to other strategies"
Risk = variance. DCA does not reduce risk, only the return.
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hoops902
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Post by hoops902 on Feb 11, 2011 15:44:08 GMT -5
The article does try to make the point of it being an emotional decision. I think it's far more linked to 2 other factors though.
1. Most people who DCA do it out of a necessity, they do it as they have access to the money ( I realize this isn't the specific factor the article was talking about)
2. Most people don't believe they have some ability to correctly time the market. The fact that the author of that article is an unemployed former hedge fund manager should shed some light on his likely investing strategy. He says things like people trying to maximize their expected value, which anyone with a financial background realizes is not true. He makes no mention of variance, particularly pricing variance as it relates to DCA. His job as it relates to investing was likely based around the idea of taking excess risk in order to hit home runs. Average doesn't cut it in the fund managing world. Better to take extra risk that most individuals would be uncomfortable taking in order to try to keep your job.
For the average person, taking less return at less risk while avoiding monstrous losses is not only more emotionally satisfying, but it's probably "optimal" as it relates to their actual goals. For those who don't believe they possess the ability to "time the market" DCA might make them feel better emotionally, but it also eliminates a pricing risk which helps offset their lack of knowledge.
It probably would be more beneficial in the long run to invest it right away assuming the market goes straight up. However it would also be more beneficial in the long run if they just shoved every single cent they had into the single best stock in the market and watch it rise. Of course no one advocates that because it's ridiculous. But following the author's logic: You shouldn't invest if you dont' think it would go up, and you should look to optimize returns. The best way to do that is with one highly risky stock. Pricing risk operates in much the same way market segment risk does, yes it's probably optimal to just shove it all in one stock at one time...but diversification in both areas doesn't necessarily mean emotional investing, it can just as simply be diversification of risk, which the author seems to largely ignore (not surprising given his background, but his hedge fund goals were likely far different than an individual investors goals).
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runewell
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Post by runewell on Feb 11, 2011 15:53:34 GMT -5
We're not advocating maximization of return by a single stock. The variance would be extremely high. You need a set of investments that will give you a diversified portfolio to eliminate all the risk that can be eliminated. From that point there is no advantage in dollar cost averaging, as reserach shows it only provides lower returns.
If you know the market is going to tank tomorrow, take your money out. Since in fact you don't know, you should have it all in (the amount of your total financial portfolio that deserves to be there)
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hoops902
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Post by hoops902 on Feb 11, 2011 15:55:24 GMT -5
According to Wikipedia: "theoretical analysis of the strategy have shown that in addition to having the admitted lower overall returns, DCA does not meaningfully reduce risk when compared to other strategies" Risk = variance. DCA does not reduce risk, only the return. When compared to what strategies? Completely ignoring that your'e quoting wikipedia for financial advice, these kind of broad sweeping generalities don't mean much. Does it reduce risk when compared to investing lump sums into singular risky stocks in high fluctuating markets? That's the most obvious time to employ a DCA strategy. It's not appropriate for all types of investing. Frankly, I'm more bothered by the idea that people are using wikipedia for financial advice.
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hoops902
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Post by hoops902 on Feb 11, 2011 16:02:57 GMT -5
We're not advocating maximization of return by a single stock. The variance would be extremely high. You need a set of investments that will give you a diversified portfolio to eliminate all the risk that can be eliminated. From that point there is no advantage in dollar cost averaging, as reserach shows it only provides lower returns. If you know the market is going to tank tomorrow, take your money out. Since in fact you don't know, you should have it all in (the amount of your total financial portfolio that deserves to be there) What research? I'd like to see what research you're claiming shows this. So far the thread has been "wikipedia says so". Frankly I've never seen any research indicating DCA is ineffective at controllign pricing risk in situations where it's generally thought to be a good idea, I'd be interested in actually seeing it. I'm just not willing to accept wikipedia's financial advice from total strangers that don't necessarily know a thing.
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Post by gsbrq on Feb 11, 2011 22:59:02 GMT -5
Agree with hoops. I've heard people argue against DCA, but never seen any hard evidence.
Show me a Monte Carlo simulation comparing DCA with lump-sum. If lump sum beats out DCA a majority of the time, that would make me reconsider the wisdom of DCA.
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formerexpat
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Post by formerexpat on Feb 11, 2011 23:37:08 GMT -5
I'm a proponent of DCA.
With that said, my real world example was when I decided to take a FHA mortgage with a loan that ended up being just about the purchase price.
I took the 20+% that I had in cash [>$60k] and started DCAing at the end of April. Every week on auto. Then the end of May, June and beginning of July happened. The entire $60k was in the market by July 4th weekend. With that money up over 20% currently, it's looking like a great decision.
Under my original plan, the $60k would have been invested over the course of 48 weeks but I had set my floor at 10k for the DJIA and was prepared to push all in at those levels.
Lazy investing can be the smartest move. I'll take the index as a whole with razor thin expense ratios and no transaction fees. You can take the professionally managed fund with high expenses or pay a bunch of transaction fees while completing your analysis with the belief AIG, Wachovia, Freddie and Bear Stearns are value investments in 2008, a la Bill Miller.
Bill Miller can afford to play with other people's money and lose nearly 60%. Not many lay investors can afford that.
Bill Miller, after 15 consecutive years of beating the S&P is now lagging the S&P cumulative since the inception of his fund due to his one, historically bad year.
I'm not confident that I'd have greater success than Bill Miller. He's much more brilliant than me.
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sunuva
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Post by sunuva on Feb 14, 2011 10:30:30 GMT -5
gsbrq: I am coming from an electrical engineering perspective (BSc) and an operational management perspective (MBA). Monte Carlo simulations are heuristic approaches to predicting an outcome by means of probability distributions. I know there have been a lot of attempts in the financial market to use statistics and trending to develop a model that predicts financial behaviour. if that was so easy to do then there would be no risk since the outcome could be predicted. I suppose someone could try to limit the variables required for randomness in creating a Monte Carlo Simulation - but to do that there need to be limits established. Just what sort of limits should be established? The same with doing a Monte Carlo simulation that won't be DCA. What are the parameters?
No, you need to look at historicals. I framed my response and my opinion by stating I can trace my dollars back to 1992. The amazing thing about the Internet today that wasn't available back in 1992 is that pretty much for the funds that people are speaking about regarding DCA the historicals are available and you can pull them into Excel and you can do whatever rolling average you want for any kind of time period. In my case, I have my original prospectus from 1992. I have a list of all of the fund being pushed at me back then through the DCA approach. I grabbed the tables of every single one of those funds. I did rolling averages for 15-year-periods on a monthly basis since my inception. The end result was regardless of your risk profile, the returns were pretty much exactly the same. I am not saying that it isn't necessarily a bad thing for all of the funds to have a return pretty much the same. What I am saying is that having a risk profile that is high-risk-high-reward and having a risk profile that is low-risk-low reward, should bear out some difference over 15-years. And unless you specifically timed the market, as was mentioned before, then all of the highs and lows averaged out to about the same, regardless of fund - for the company, at the time, for the funds they had for people like me. DCA had no difference. And I believe I made a reference to that in my post. DCA is no a high-risk endeavor in the companies that market it for the funds they are pushing.
To me, DCA, is putting in the same amount of money into exactly the same thing over a period of time - buying more of that exact same thing when prices are low and buying less of that exact same thing when prices are high - and doing so with intent and purpose. If a portion of your paycheck does that every set period I harekn, as others do, that it isn't DCA but is an investment strategy that either meshes with your employment situation (may not have an option) or a strategy that meshes with your risk profile.
People couldn't understand my reference to them doing their own trades with their own brokerage account and used the assumption that you could only do that with a large lump sum. Quite the opposite, you can do that with any amount of money as many times as you want, you can just do it cheaper. You decide what to buy and when to buy it - and that includes funds. But if doing your own trades is not something you are comfortable with, recognize that as part of your risk profile. My claim was DCA is not suited for high-risk-high-reward. And it is also part of my claim of that the "lazy man" does not have a high-risk-high-reward profile. If you accept my defintion of DCA as buying more of the same when its low and buying less of the same when its high, why not just buy at two times per year? Put half in in February and then see where the market is in August. If it's higher than put your other half in and buy less than you did in February. If the market is lower then buy more than you did in February. Is that market timing? if you do that automatically every year from now until retirmenet is that still market timing? That is the fallacy of DCA in that they say it has to be regular tiny increments because that isn't market timing. So, where is the dividing line between market timing and not market timing? If once-per-year and twice-per-year is market timing and twelve-times-per-year is not market timing, then is six time per year market timing? What if it isn't a tiny amount? Is it then market timing? I got started in investing with DCA back in 1992. I was most displeased with my returns. I was even more displeased when I took stock of all the funds available to me regardless of risk and compared them to each other in a "what-if" scenario for my period of investing and found negligible difference in them. So the company that pushed these funds and aggregrated them to various risk profiles either did a really poor job (which I am certain they did), or the funds just have such a wide array of particular investments that they bear little resemblance to the risk profile to which they are assigned (of which that is true). So I got more involved in my financial life and said I'll do it myself. One option is to investigate other funds and do the DCA with them. That involves a lot of research. Another option is to cherry-pick the vehicles I like the best - and that involves a lot of research. Either way you look at it it involves a lot of research. So, I figured for my risk profile (high-risk-high-reward) I would not DCA since I couldn't get that equation to work. The only way to know if I am correct is many years into the future when I retire. And the same can be said for anyone who is going to DCA - you only know in the future if your strategy worked out. I would also add that if you take stock of your situation and decide to change your investment strategy that you are not staying true to your DCA since if you are displeased with your current strategy, then DCA would suggest you just stick with it. And that, I believe, is the crux of the DCA argument. You don't have any wiggle room. You are either stuck with your choice way back when and ride out to the end or you take stock and say "I am most displeased I need to make a change." So, how exactly, is that still DCA? No argument presented has ever convinced me that making a change still qualifies as DCA? Because the definition I have stated implies there is no change.
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hoops902
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Post by hoops902 on Feb 14, 2011 11:16:14 GMT -5
"My claim was DCA is not suited for high-risk-high-reward. And it is also part of my claim of that the "lazy man" does not have a high-risk-high-reward profile."
Right, the entire purpose of DCA is to limit market timing risk, so it would not be the proper strategy for someone who wanted high risk.
"That is the fallacy of DCA in that they say it has to be regular tiny increments because that isn't market timing."
Who are "they" that say this? I agree that it doesn't need to be tiny increments, but I also haven't heard anyone say that it does.
"Put half in in February and then see where the market is in August. If it's higher than put your other half in and buy less than you did in February. If the market is lower then buy more than you did in February. Is that market timing? if you do that automatically every year from now until retirmenet is that still market timing?"
If the idea is to do it every year until you retire, and you're going to buy $X regardless, then I don't understand your point about "see where the market is".
"If once-per-year and twice-per-year is market timing and twelve-times-per-year is not market timing, then is six time per year market timing?"
Who says once per year or twice per year is market timing? The key to DCA is a fixed amount at regular intervals. That fixed amount and those regular intervals can be anything you want them to be.
"So, I figured for my risk profile (high-risk-high-reward)"
All depends how high of risk. True high risk high reward would mean you shove every penny you have a single incredibly risky stock and hope it takes off, and if not you go broke.
"And that, I believe, is the crux of the DCA argument. You don't have any wiggle room. You are either stuck with your choice way back when and ride out to the end or you take stock and say "I am most displeased I need to make a change." So, how exactly, is that still DCA?"
What is "way back when" to you? You can DCA for 3 months and then re-evaluate if you like. The purpose of DCA is to decrease market timing risk. So I sit down and say "Ok, I want to be in fund Y for $5,000. I'm going to put in $1,000 on the 1st for the next 5 months". The point is that the time period you pick coincides with the time you're going to re-evaluate your investments if you're intelligent. If you are going to evaluate it every month, then I might invest $1,250 each week for 4 weeks. There is no "i am displeased, I need to make a change" because you set the time period up front, if you think you're market savvy enough to time the market then you don't DCA and you don't invest it on the day you evaluate the investment, you wait until you think the time is "right" to plunk your money down.
"No argument presented has ever convinced me that making a change still qualifies as DCA?"
Changing means you are stopping the DCA and choosing to invest in something else. Saying "I use a DCA strategy" doesn't hold someone to follow that fixed amount at specific intervals for life. So I agree, it's not DCA once you stop, you were DCA'ing, and now you've chosen to stop DCA'ing, it's not that complicated.
"And the same can be said for anyone who is going to DCA - you only know in the future if your strategy worked out."
The same can be said for anyone who's ever invested in anything by any method. You only know in the future if it worked out. Applying broad generalities of all investing to one investing method says nothign about that specified method.
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Post by Savoir Faire-Demogague in NJ on Feb 14, 2011 11:28:16 GMT -5
I find all these references, long winded explanations and philosophizing about strategies, etc., quite tiring.
The average middle class wage earner, you know the mortals amongst us, typically, regularly invest money into their deferred defined contribution plans at the place of employment. While we all have taxable accounts as well, the bulk of our new money is going into our retirement plans at work every time we get paid. Like it or not this is DCAing. I also have a taxable account that is widely diversified. Every now and then, like once or twice per year, I'll send in a few thousand to put into the account. Few of us here, and in real life have $500,000 every couple of months burning a hole in our pockets. One can come up with all the arguements, references, 75 years of market data till you are blue in the face. None of it applies.
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sunuva
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Post by sunuva on Feb 14, 2011 15:24:31 GMT -5
To hoops902: Whoa - picking apart statements as if there were some discourse - not entirely sure where the discourse is. To explain: DCA means "Dollar Cost Averaging" and my understanding is the key thing to remember is "Averaging." You have given me some very specific examples that I feel don't fit the definition of DCA as is purported by "they/them." And I used the general form of "they" as in any sort of reference material that talks about DCA (including this forum) - not certain why that is such an "attack frame of reference, but c'est la vie". DCA is for the long haul. Your examples of putting in $1200 per week for 4 weeks into the exact same thing I wouldn't necessarily say is dollar cost averaging - since as you say, you re-evaluate - and change where your investment dollars go. I wouldn't say you are the "lazy man." But if you want to define your investment strategy as dollar cost averaging (I'd say 1 month and 3 months as per your examples are short-term timeframes and I would say that DCA as it is being pushed by "they" assumes timeframes far longer than that).
The reason I used the phrase "see where the market is" is to explicitly explain why I don't believe in "dollar cost averaging." As you will note, I used the exact same phrase and said "buy" when the market is higher or when the market is lower. Now extrapolate that to as many times per year (per time period) as you want. If that's the definition of dollar cost averaging and it gets dumbed-down to "I'll just do it, regardless, I don't need to know where the market is" then that is the "lazy man." But, as you say, if any time period and any amount of money qualifies as dollar-cost-averaging so long as you have a specific time-frame, then a strategy of buy low and sell high qualifies as a dollar-cost-averaging scenario. I choose to put in larger lump sums at a fewer and infrequent interval, into vehicles that may not necessarily be the same. My specific time-frame is determined not by linear means, but by an irregular detremination, but a determination, nevertheless. And in cases where I have not/am not able to sell higher, well that is what stop limits are for. I limit my losses but don't necessarily limit my gains.
And you agree exactly with my last statement - not sure if you were agreeing to say you are agreeing or spelling it out because you felt there was some disagreement. In either case you only know if you are right when you get to the end. I believe that is exactly what I said. No matter what your risk profile - you will only know at the end. So when I use phrases of "way back when" I mean "way back whenever you (or me or some unrelated third party - just a person in general) want to say is your starting period (that would be the when of the statement). If you are never in the "displeased" crowd, I doubt you would ever make a change (and the word "you" just refers to some person who may be reading this). In my finances if I am displeased I tend to not go down that path again. If I am pleased, I tend to go down that path again. But judging from this board there have been quite a few people that have had "I am most displeased" moments in their lives.
To Savoir Faire: The intent of this post was to discuss Dollar Cost Averaging. If I understand you correctly you find aspects of Dollar Cost Averaging to be tiring. Fair enough - but there may be others who are looking for some discussion on both sides of the fence. So, my opinion is completely the opposite of yours. Like you I don't drop $500,000 every couple of months. However, I believe all arguments, references, and 75-years-of-data until I am blue in the face absolutely applies. That is why there is a discussion. I certainly like to hear what others have to say, particularly when it is something I am completely unfamiliar with (real estate investing), something I cannot relate to (estates), or when there is a difference of opinion (DCA). One never knows when a little bit of wisdom, the diamond-in-the-rough advice, anecdote, or opinion can prove to be valuable (or even invaluable as the case may be).
I can let people form their own opinion regarding my anecdotal evidence from my investing horizon beginning with DCA in 1992. And they can form their own opinion when 15-years later (2007) I took charge of my own finances - amalgamated the three different retirement vehicles for which I was locked (as I made mention, depending on your employment history you may be locked into certain vehicles) and paid the penalty fees for doing that and just started doing it myself. The opinions will probably be some color shade between "Hey, I should do that" to "No way would I ever do that," and some colour shade between "He was pretty smart taking charge like he did" to "He was a complete idiot taking charge like he did."
So, how have I performed overvthe past three years?
Well, in my retirment account I have performed exactly the same as the previous 15-years. No noticeably significant changes to NAV. But I believe my investment choices are better suited for long-term growth and income than were the vehicles I was in, previously (perhaps an emotional statement, but I understand that). So all one can say with my 3 years versus the previous 15 years is that I could do no better than actively managed funds. However, I also haven't done any worse (comparing 3 years to 15 years).
In my investment account my PRR is 41% (I take more risk with this one than I do with my retirement account). I specifically flag my investment vehicles based on PRR. When they get inordinately high, I lock in the gains - I don't ride them on to infinity. Take the emotions out of the decision. When the PRR is inordinately low I stop loss. So far, the riding high and stopping loss has my PRR at 41% over the past three years. If that is DCA then I am averaging on the up side.
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Post by Savoir Faire-Demogague in NJ on Feb 14, 2011 15:34:26 GMT -5
To Savoir Faire: The intent of this post was to discuss Dollar Cost Averaging. If I understand you correctly you find aspects of Dollar Cost Averaging to be tiring. Fair enough - but there may be others who are looking for some discussion on both sides of the fence. So, my opinion is completely the opposite of yours. Like you I don't drop $500,000 every couple of months. However, I believe all arguments, references, and 75-years-of-data until I am blue in the face absolutely applies. That is why there is a discussion. I certainly like to hear what others have to say, particularly when it is something I am completely unfamiliar with (real estate investing), something I cannot relate to (estates), or when there is a difference of opinion (DCA). One never knows when a little bit of wisdom, the diamond-in-the-rough advice, anecdote, or opinion can prove to be valuable (or even invaluable as the case may be).
You misunderstood my post. The average middle class schmo HAS to DCA because they have no other alternative, nor the cash. Almost everyone here DCA's because they are in their firms retirement plan. To get the maximum company match you have to spread out one's contributions, plus there is a percentage limit. I cannot put in $22,000 in January because the 401K rules do not allow it, and I would not get the full company match. For my Roth IRA, I do not DCA but rather put in roughly $4000 in April, after making the last of my contributions for the prior year. In a way, for my Roth I put it all in upfront rather then put $500 per month. I have the money, so I do it. I have heard of studies and analysis that do indeed say it is better to put all your money in the market up front, rather than DCA, but the average person is not in the position to do this, unless they have received some large lump sum payout or settlement from some source.
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hoops902
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Post by hoops902 on Feb 14, 2011 16:08:22 GMT -5
"You have given me some very specific examples that I feel don't fit the definition of DCA as is purported by "they/them." And I used the general form of "they" as in any sort of reference material that talks about DCA (including this forum) - not certain why that is such an "attack frame of reference, but c'est la vie"."
This is nothing more than politicking though. You create your own group of "they" and then assign to that group any arguments that you wish you argue against, rather than arguing against any actual statements made by the opposition. Which leads to the natural question of "who is this 'they' you're speaking of?".
I understand that you think a group supporting DCA thinks a certain way, however my thinking was the intent of the thread was to discuss DCA, not to discuss whether most people have any idea what DCA is, how it works, or in which situations it's appropriate.
"You have given me some very specific examples that I feel don't fit the definition of DCA as is purported by "they/them.""
This is my point, I'm unconcerned with whether the collective "them" understands DCA in it's definition or practice. For example, in a thread about the advantages/disadvantages of running an option offense in football...I'm more interested in discussing the option offense than I am in discussing whether the average person understands it.
So whether or not my examples of DCA fit the incorrect definition by some collective "them" is simply unimportant in my mind to the discussion of the merits of DCA itself.
"I have heard of studies and analysis that do indeed say it is better to put all your money in the market up front, rather than DCA, but the average person is not in the position to do this, unless they have received some large lump sum payout or settlement from some source."
In referring to my example above about putting in $1250 per week for 4 weeks, this is the type of thing I'm talking about in regards to people not understanding DCA. Much of the data to conclude that it's better to simply shove your money in now compares lump sum investing to 12 month DCA investing. In reality one of the best uses of DCA for those who DO have the option of lump sum is in a short DCA timeline so as to get their money in quickly while still averaging into potentially volatile short term price risk.
The idea of taking a large lump sum and moving it into the market over 12 months or so is DCA, but lags far behind in practice to the more practical ideas of investing a fixed amount as you acquire it or doing a short term DCA to hedge market timing risk. Yet when people want to discuss DCA, opponents immediately seem to want to latch onto this far less common practice of having a large lump sum and taking a long timeline to invest it.
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hoops902
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Post by hoops902 on Feb 14, 2011 16:13:41 GMT -5
And part of the reason I don't believe that the collective "they" is important is that on this board specifically there is talk about the benefits of DCA. And in context the discussion essentially comes down to what SF is talking about. People recommend DCA because to the people it's being recommended to the options are to either DCA as you receive the money, or don't DCA and save up to one point in time and put your money into the market later (and in some cases probably spend it because that's what people who come to YM for advice have a habit of doing, spending money they shouldn't). In some ways that particular scenario which is so prevalent is akin to telling people to pay off their smallest CC balance first, it's not the absolute best thing you can do from a numbers perspective, but if it keeps you on the path..it's better than the alternative which you won't follow through with.
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runewell
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Post by runewell on Feb 14, 2011 16:26:22 GMT -5
Frankly, I'm more bothered by the idea that people are using wikipedia for financial advice. I went to Wikipedia for information on dollar cost averaging, not financial advice. And for those of you quick to question the research, you might actually try reading the links below before jumping to conclusions. Hmmm let's try reference #8: "Nobody gains from dollar cost averaging analytical, numerical and empirical results" It was written by two finance professors from the U of CT. Hmmm let's try reference #7: "Dollar Cost Averaging A Technique that Drastically Reduces Market Risk" By Joshua Kennon, About.com Guide. This guy doesn't state any credentials at all and the single example he gives in when the stock market is in a continual downturn. This is a very one-sided article and yet how many people just accepted it blindly. One thing he does manage to do is give the definition of DCA: Dollar Cost Averaging: What is It? Instead of investing assets in a lump sum, the investor works his way into a position by slowly buying smaller amounts over a longer period of time. Periodic investing is not DCA by this very definition. DCA is the act of having $X but choosing to invest a smaller amount $Y over different time periods. Periodic investing into my 401k invests the entire lump sum immediately.
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Post by Savoir Faire-Demogague in NJ on Feb 14, 2011 16:32:14 GMT -5
Periodic investing is not DCA by this very definition. DCA is the act of having $X but choosing to invest a smaller amount $Y over different time periods. Periodic investing into my 401k invests the entire lump sum immediately.
Are you sure you understand 401K(and related) investment procedures? 401K plans are by nature dollar cost averaged investments.
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SVT
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Post by SVT on Feb 14, 2011 16:39:34 GMT -5
How far into DCA do we want to go? LOL To DCA, do we have to only make a yearly contibution? Monthly? Weekly? Daily? Do I need to buy some stock every hour? LOL
I agree with SF, though. To me, he's saying that all this back and forth is almost pointless because most everyone is forced to DCA anyway.
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hoops902
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Post by hoops902 on Feb 14, 2011 16:40:16 GMT -5
Frankly, I'm more bothered by the idea that people are using wikipedia for financial advice. I went to Wikipedia for information on dollar cost averaging, not financial advice. And for those of you quick to question the research, you might actually try reading the links below before jumping to conclusions. Hmmm let's try reference #8: "Nobody gains from dollar cost averaging analytical, numerical and empirical results" It was written by two finance professors from the U of CT. Hmmm let's try reference #7: "Dollar Cost Averaging A Technique that Drastically Reduces Market Risk" By Joshua Kennon, About.com Guide. This guy doesn't state any credentials at all and the single example he gives in when the stock market is in a continual downturn. This is a very one-sided article and yet how many people just accepted it blindly. One thing he does manage to do is give the definition of DCA: Dollar Cost Averaging: What is It? Instead of investing assets in a lump sum, the investor works his way into a position by slowly buying smaller amounts over a longer period of time. Periodic investing is not DCA by this very definition. DCA is the act of having $X but choosing to invest a smaller amount $Y over different time periods. Periodic investing into my 401k invests the entire lump sum immediately. Lol, so you want to discredit the author in one sentence, then proceed to use his definition of DCA in the next? So by the very definition of a guy you say has no credentials, you want to cherry-pick his narrow and misguided definition?
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SVT
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Joined: Dec 20, 2010 15:39:33 GMT -5
Posts: 1,491
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Post by SVT on Feb 14, 2011 17:18:35 GMT -5
Frankly, I'm more bothered by the idea that people are using wikipedia for financial advice. I went to Wikipedia for information on dollar cost averaging, not financial advice. And for those of you quick to question the research, you might actually try reading the links below before jumping to conclusions. Hmmm let's try reference #8: "Nobody gains from dollar cost averaging analytical, numerical and empirical results" It was written by two finance professors from the U of CT. Hmmm let's try reference #7: "Dollar Cost Averaging A Technique that Drastically Reduces Market Risk" By Joshua Kennon, About.com Guide. This guy doesn't state any credentials at all and the single example he gives in when the stock market is in a continual downturn. This is a very one-sided article and yet how many people just accepted it blindly. One thing he does manage to do is give the definition of DCA: Dollar Cost Averaging: What is It? Instead of investing assets in a lump sum, the investor works his way into a position by slowly buying smaller amounts over a longer period of time. Periodic investing is not DCA by this very definition. DCA is the act of having $X but choosing to invest a smaller amount $Y over different time periods. Periodic investing into my 401k invests the entire lump sum immediately. "Joshua has been the Investing for Beginners Guide at About.com, a division of The New York Times, since February, 2001. He is the author of The Complete Idiot's Guide to Investing, 3rd Edition. In addition to being a successful investor and bestselling financial author, he spent time in the accounting and investing department at a major east coast property and casualty insurance group."
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SVT
Well-Known Member
Joined: Dec 20, 2010 15:39:33 GMT -5
Posts: 1,491
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Post by SVT on Feb 14, 2011 17:37:27 GMT -5
I went to Wikipedia for information on dollar cost averaging, not financial advice. And for those of you quick to question the research, you might actually try reading the links below before jumping to conclusions. Hmmm let's try reference #8: "Nobody gains from dollar cost averaging analytical, numerical and empirical results" It was written by two finance professors from the U of CT. Hmmm let's try reference #7: "Dollar Cost Averaging A Technique that Drastically Reduces Market Risk" By Joshua Kennon, About.com Guide. This guy doesn't state any credentials at all and the single example he gives in when the stock market is in a continual downturn. This is a very one-sided article and yet how many people just accepted it blindly. One thing he does manage to do is give the definition of DCA: Dollar Cost Averaging: What is It? Instead of investing assets in a lump sum, the investor works his way into a position by slowly buying smaller amounts over a longer period of time. Periodic investing is not DCA by this very definition. DCA is the act of having $X but choosing to invest a smaller amount $Y over different time periods. Periodic investing into my 401k invests the entire lump sum immediately. Lol, so you want to discredit the author in one sentence, then proceed to use his definition of DCA in the next? So by the very definition of a guy you say has no credentials, you want to cherry-pick his narrow and misguided definition? I think what runewell is saying here, by quoting your above text and in response to your post no. 36, is to read the links he's posting. Do you understand how wikipedia works? I don't understand people discrediting wikipedia when the information that is put into wikipedia has references to credable sources in which the information was taken from. The wikipedia article on DCA, as almost all articles on wiki do, is describe the pros and cons, and all the criticisms of the particular subject. In this case, runewell is quoting examples from the criticisms section of that wiki page. One of them, if you click on the link under reference no. 8 takes you here: www.sciencedirect.com/science/article/B6W4D-45JK782-6/2/bec35bbe850cf520ddbb20d9eb634271It looks to be a link to an abstract of a research paper done by two finance professors claiming the following: "Dollar Cost Averaging is an investment system that is widely advocated by brokerage firms and mutual funds. In its best known form, an investor seeking to put a lump sum into risky assets is counseled to invest the money over a period of time in equal installments in order to avoid the devastating effect of a market fall immediately after a single, lump-sum investment. Using graphical analysis, historical stock market returns, and Monte Carlo simulations, this article demonstrates that no such benefit accrues to a Dollar Cost Averaging Strategy. Two alternative strategies, optimal rebalancing and buy and hold achieve better performance in all three analyses." The bolded and underlined section seems to be some of what you were asking for, although, I don't see where you can actually click a link to get the actual graphs and information. It might be something that has to be paid for? Anyway, I agree with DCA LOL
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runewell
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Joined: Jan 3, 2011 15:37:33 GMT -5
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Post by runewell on Feb 15, 2011 15:22:53 GMT -5
We aren't likely to be able to agree on the definition of DCA because I'm seeing mulitple definitions on the internet. Some sources say it's all investing done over time intervals, others say it only applies when you have a lump sum to invest. So nobody will be able to define the semantics of DCA there without someone else having ammunition to the contrary. The better question is should we be doing it. Here's a site where you can select a time period and find out if all in or investing 1/12 over 12 months would have been better. His conclusion: Dollar cost averaging means investing a fixed amount at fixed intervals of time. That's a sensible approach, for example, if it means committing yourself to investing a fixed amount of your salary every month toward your retirement. However, some people also think you should dollar cost average a lump sum. For example, if you had $12,000 that you wanted to invest in a stock index fund, they would tell you to invest $1000 per month over a year, rather than investing the whole amount immediately. The rationale is that market volatility should then work in your favor, because you will automatically be purchasing more shares when the price is low, and fewer shares when the price is high. As appealing as that theory is, its advantage looks like a myth, as this calculator shows. It uses market data to let you compare dollar cost averaging with lump sum investing for the start date you specify. Each strategy wins at least some of the time, but after a few runs you'll see that DCA is the statistical "dog", losing about two times out of three. Of course, dollar cost averaging will win if your start date falls right before a dramatic crash (like October 1987) or at the start of an overall 12 month slump (like most of 2000). But unless you can predict these downturns ahead of time, you have no scientific reason to believe that dollar cost averaging will give you an advantage. So why do so many people persist in believing that this old dog really knows how to hunt? Maybe because it has a psychological appeal: if the market dips, people will be happy because DCA will be saving them money; and if the market goes up, people will be happy regardless. www.moneychimp.com/features/dollar_cost.htm
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