Yet another LS vs. DCA question

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Yet another LS vs. DCA question

Postby boilerhorn » Wed May 22, 2013 12:20 am

First post.

In a moment of irrational behavior, I moved all of my 401k assets to cash (Fidelity MM) a couple of years ago. My passivity has led me to inactivity in that account. It's time to fix it.

I plan to migrate to an AA of Bond-10 (34%), and 70%TM/30%Int of the remaining 66%. I'm still vacillating on the DCA vs. LS deployment of funds. What do folks here recommend for the rate of DCA per month if I choose DCA? One could argue that, since I'm undecided, a higher deployment rate might make sense.

If you have chosen DCA in a similar situation, what approach did you use and why?

Thanks.
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Re: Yet another LS vs. DCA question

Postby Johm221122 » Tue May 28, 2013 11:22 am

Welcome to forum
I just don't believe in DCA , pick AA that allows you to sleep at night and reach your goals
John
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Re: Yet another LS vs. DCA question

Postby hollowcave2 » Tue May 28, 2013 11:43 am

Some investors might feel a bit uneasy about moving a large block of money into stocks at their all time highs. DCA gives you a way of moving into stocks over a period of a few months so that you spread out the risk in the short term. Now, if you can honestly say that since you're a long term investor, you can ride through a correction this year and stay the course, then a lump sum would be fine. But if you think you might change your allocation based on short term events, then DCA gives you a way to stay the course and still get some sleep. DCA is a risk management technique that allows you to get into the market without the investment paralysis that could result when considering the short term risk of a lump sum. The goal of DCA is to invest immediately and consistently while minimizing the emotional anguish that could result with short term market fluctuations. DCA is not about maximizing performance, but managing risk.

So it depends on what type of investor you are. If you can just set it and forget it, then a lump sum would be fine. But if you find yourself checking the markets to see if you "timed your entry" correctly, then DCA would be better. An additional benefit of DCA is that you are guaranteed an average cost of your purchased shares, during the time of DCA, that is less than the average market price during the same period. This results because since you are investing a predetermined sum of money each month, you buy more shares when the price is low and less when the price is high. There are very few guarantees in investing, but DCA offers one of them.

As an example, you can choose a time period of 6 to 12 months, split the money into equal parts, and invest each part monthly.

Whatever you choose, good luck. And remember that it's time in the market, not timing the market, that counts.

Steve
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Re: Yet another LS vs. DCA question

Postby Aptenodytes » Tue May 28, 2013 11:58 am

You should move in as fast as you can tolerate. Only you know how fast you can tolerate.

If you are completely immobilized and need some external guidepost, try this: deposit 12 equal monthly sums over the next year, arriving at your AA in one year. Any scheme is as good as another as long as it gets you to your AA.
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Re: Yet another LS vs. DCA question

Postby umfundi » Tue May 28, 2013 11:03 pm

hollowcave2 wrote:Some investors might feel a bit uneasy about moving a large block of money into stocks at their all time highs. DCA gives you a way of moving into stocks over a period of a few months so that you spread out the risk in the short term. Now, if you can honestly say that since you're a long term investor, you can ride through a correction this year and stay the course, then a lump sum would be fine. But if you think you might change your allocation based on short term events, then DCA gives you a way to stay the course and still get some sleep. DCA is a risk management technique that allows you to get into the market without the investment paralysis that could result when considering the short term risk of a lump sum. The goal of DCA is to invest immediately and consistently while minimizing the emotional anguish that could result with short term market fluctuations. DCA is not about maximizing performance, but managing risk.

So it depends on what type of investor you are. If you can just set it and forget it, then a lump sum would be fine. But if you find yourself checking the markets to see if you "timed your entry" correctly, then DCA would be better. An additional benefit of DCA is that you are guaranteed an average cost of your purchased shares, during the time of DCA, that is less than the average market price during the same period. This results because since you are investing a predetermined sum of money each month, you buy more shares when the price is low and less when the price is high. There are very few guarantees in investing, but DCA offers one of them.

As an example, you can choose a time period of 6 to 12 months, split the money into equal parts, and invest each part monthly.

Whatever you choose, good luck. And remember that it's time in the market, not timing the market, that counts.

Steve

If you invest the lump sum now, you will get the market return over the next year. If you DCA over the next year, you will get about half the market return.

DCA is an inferior way to manage risk. The better way is to adjust your AA.
This results because since you are investing a predetermined sum of money each month, you buy more shares when the price is low and less when the price is high. There are very few guarantees in investing, but DCA offers one of them.

This is incorrect and misleading. DCA will come out ahead if the (geometric) mean price over the DCA period is lower than today's price. If you believe that, why invest at all? Just wait for prices to go down, then buy.

Keith
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Re: Yet another LS vs. DCA question

Postby Scooter57 » Wed May 29, 2013 9:59 am

umfundi wrote:This is incorrect and misleading. DCA will come out ahead if the (geometric) mean price over the DCA period is lower than today's price. If you believe that, why invest at all? Just wait for prices to go down, then buy.

Keith


Well, I for one am investing in small monthly amounts using a 3 year schedule (Value Averaging instead of DCA but similar concept) because, as is often stated here, my crystal ball is cloudy. My guess is that we will have a significant correction over the next 3 years, and if we do, my investment plan will have me increasing my monthly investment amount. But because there is a possibility that we won't have a correction over this time period, I put something into the market every month in the meantime. It's called "hedging your bets" and it helps me sleep at night.

Of course, there is also the possibility that the market could rise throughout the next 3 years an then plummet when I was fully invested, which is why the goal of my monthly investment strategy is to end up with an amount in stocks when I am fully invested that, if it lost more than 50% of its value ,wouldn't dramatically change my retirement prospects or lifestyle.

Going into the market without very carefully thinking out that stock allocation would be a huge mistake. Figuring out that allocation without figuring what you'd do if stocks dropped 80% is another one. They have in the past and they could again. And of course a 50% drop is quite likely--as is a 50% drop that unlike the one in 2009 does NOT start rising back after only one bad year.
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