DCA, from Phil McDonnell

February 4, 2009 |

If one can predict the market then there are better techniques than Dollar Cost averaging. But DCA is a decent strategy if two conditions hold:

  1. One cannot predict the market.
  2. One has an external income source available to be invested regularly.

Leveraged ETFs can grind investors up in unexpected ways because of the daily rebalancing. I suspect he will see that these ETFs are the exact opposite of a DCA strategy. In DCA your investment buys more shares after a dip and acquires fewer shares after a market rise. Overall your average share price is below the average of the market prices.

Leveraged ETFs employ the exact opposite strategy. When the market rises they are forced to buy more shares. When it falls they are forced to sell shares to maintain their constant leverage ratio. The net result is they buy shares at an average price above the average of market prices over the period. Thus the levered ETFs use an anti-DCA and that is what causes the grind.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Larry Williams comments:

I would add a third condition: Markets make new highs.


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