Thread: Dollar Cost Averaging is a Myth?

Do know the title/author of the 1979 article referenced by Mr. Middleton?

I have read articles comparing the advantages of investing a lump sum to DCA when you have a lump sum to invest. For example, if someone leaves you $1M. However, DCA investing over a long period of time into a 401K seems to be universally applauded.

Nope. Online indices only back to 1995. DCA is reasonable given computerized banking. It makes people invest regularly. Sales people like it because they get your $$ in a perpetual stream.

BUT, the reason usually given is that that it reduces market risk or the average longterm cost of the security better than lump sum or stochastic investing, which seems to be false. When you think about it, random would be just as good, and to beat the longterm average cost of the security (no matter when you invested), you'd have to time the market to avoid highs, and that requires prediction, which is exactly what DCA was supposed to finesse.

Originally Posted by JAC

Nope. Online indices only back to 1995.

I'm not quite sure I understand your statement. I have TSP fund index data back to 1988. I have C Fund, I Fund, and REIT data back to 1970 (S&P 500/EAFE/NAREIT indexes). Most researchers use stock/bond market data starting in 1926.

I find Mr. Middleton's referencing of a study - no author, no title, suspect. In addition, it's easy to come up with scenarios in which DCA would out perform lump sum. For example, this year, lump summing the I Fund on 9 May would have been a disaster compared to starting a DCA program on the same date.

Mr. Middleton may very well be right. However, it's hard to verify his claim without reading the referenced study.

Sorry, I meant the online indices to the Journal of Financial & Quantitative Analysis only go back to 1995, so unless someone has access to that pub, we'll probably never know what the academic said.
Looking back in time one can certainly pick days when lump summing does better or worse than DCA. The hard part is looking forward. That's also why one of the articles said stocks move up about twice as often as they move down. If true, I guess it means bull markets last longer than bears. That might mean that lump sums are better than DCA because you get all your money into the rising market ASAP, as opposed to stretching it out. In a falling market, DCA would outperform single large buys.
DCA assumes that you can't time the market...in the long run, it's equivalent to many small random buys. If you can time the market, then lump sum might be better, unless missing out on lots of little bounces did you in.
I think the point is that DCA is no better that other ways. It's neutral.
J

And, what we do here is pretty much lump sum transfers, no? For example, did the market last week find a new bottom, or was it part of the much anticipated 10% correction? If the former, transfer a big amount to the C fund. If the latter, DCA into the C fund. But few here DCA in and out of funds, tho I guess we all DCA into TSP to maximize employer matches, etc.
My point. If DCA'ing was a sure bet, then I ought to move that 30% into the C fund in 15 weekly trades of 2%, not 30% tomorrow.
J

Originally Posted by JAC

If DCA'ing was a sure bet, then I ought to move that 30% into the C fund in 15 weekly trades of 2%, not 30% tomorrow.
J

Nothing is a sure bet. However, if to DCA or not is important to you, I'd get a copy of the study. Alternatively, engage Birchtree in a conversation. He's a huge DCA advocate.

I'm not personally committed one way or the other. Just back into learning about all this stuff after a gap and while nosing around found these attacks on DCA, which made sense. This being the longterm strategy forum, thought I would see if anyone had an opinion. I suppose Birchtree will happen upon this if he's interested.

JAC,

Your investing strategy may depend on the amout of energy you have available to stay market current. When a member asks me for a recommendation prior to deployment for example, I usually tell them to put their DCA on automatic pilot, suggesting 75% C fund and 25% I fund until they are in more control. Fate can be an excellent guide providing you have a trust in fate. It's a simple way to cycle ride and accumulate as many shares as possible with the least amount of energy expenditure. I would rather accumulate the shares than push for the dollars - the dollars will eventually arrive on their own accord. I want 40,000 shares backing me up when I'm ready to pistol shoot - and staying with TSPtalk will help educate me in the fine art of hitting the targets. When you play with that kind of money you don't want to make many mistakes. There will be more volatility going forward in the next few years and I'll be ready with my dual Sturm Rugers.

Dennis

This is the question I can't answer, consistently. I once believed that number of shares was the key. Then I thought, the only reason to accumulate shares is in order to accumulate dollars, so why not count dollars instead?

Which would you rather have, lots of shares worth nothing or lots of dollars worth nothing?

Dave

I'll take the shares every time - because once they are yours they are yours. They may fluctuate in value over the years as you accumulate them, but they still remain yours. And at some point in the distant future the gift horse may come along at the right time - and bingo you do an IFT for safety. Wasn't that easy?

Why look at DCA as an 'all-or-none' proposition? Why not use a combination of DCA and technical analysis to adjust the contribution rate?

Since markets, when viewed from a long-term perspective, have discernable trends, for example an intermediate trading-range within the long-term uptrend, adjustments in contribution allocation can be used to take advantage of those fluctuations.

It's not that hard to identify the upper and lower trading range, and adjust your contribution allocation accordingly, depending where the index value is within the trading range.

For example, in a 'long-term up' market, you calculate the 50-week or 60-week moving avg of the S&P 500 (this is assuming that the index value is higher than the MA), then adjust your contribution allocation upward as the index falls closer to the average, and decrease it as it moves up and away. You still maintain DCA throughout, but at a varying rate.

The same goes for declining markets. If the MA is declining and the index value is below the MA, then you decrease the contribution allocation the closer you get to the MA, and increase it as it moves farther away.

This is clearly an improvement over using DCA with a constant rate of allocation.

In summary, contribution adjustments ought to take into account that intermediate changes in price within the long-term trend can be measured, and should increase the number of shares over the 'constant rate' approach.