Feb

4

DCA, from Phil McDonnell

February 4, 2009 |

11 Comments so far

1. Craig Bowles on February 4, 2009 7:46 am

   The gaps on the open are often so large that it doesn’t matter what the market does for the next hour or whatever as the gap corrects. Maybe it’s individual investor freaking out on overnight news but it was interesting to watch last year with the volatility.

2. Steve Leslie on February 4, 2009 5:06 pm

   DCA is but another strategy that can be used among many. Dogs of the Dow may very well work this year. There is no perfect strategy, perfection is not to be found in this world. Only in the hereafter. The perfect strategy is to buy at the bottom of a trough and sell the peak. But we know nobody has perfected this strategy nor any strategy. Any seasoned veteran already knows this. It is mere sophistry to argue this point. Moving on, I think a great philosophy I learned long ago. when you leave a position leave with something left on the table for the next guy. There is no such thing as getting out at the top. That is a canard. This is because the markets have no time limit, they do not end. We do. Our goal in life is to get our piece of the pie. How we get there is up to us. sl.

3. Ronald James Padanova on February 4, 2009 6:01 pm

   Steve, Is there any substance at all to what you wrote? There have been a lot of interesting points back and forth on this subject, and I am worried that I am missing a gem in what on the surface appears to be mostly meaningless platitudes, as any seasoned veteran would know. Please enlighten me, as you normally provide much useful insight. Thanks.

4. Jayson Blair on February 4, 2009 6:04 pm

   Steve Leslie is incorrect. There do exist perfect strategies. My strategies have never failed me; I have never had a losing trade, or even single day without positive profits, in my over 35 years of trading experience, so I know whereof I speak.

5. Rocky Humbert on February 4, 2009 10:18 pm

   Larry: I don't know whether your comment was tongue-in-cheek. But if it was not, then I believe that you are incorrect. There is no requirement for new highs. The return of dollar cost averaging is =

   r = [ P{F}/ p'{P} minus 1 ]

   where P{F} is the final price of the investment
   p'{P} is the harmonic mean of the purchase price

   Remember that you are buying more shares at lower prices, so the harmonic mean drops quickly to the market.

   The only situation where DCA will not EVENTUALLY show a positive return would be a situation where the stock market goes to zero, and stays there.

   Here is the math of the DCA calculation:

   http://tsp.peacefulgains.com/Derivation-of-the-dollar-cost-averaging-return-formula/

6. Anatoly Veltman on February 4, 2009 10:48 pm

   Steve reminded me of my spiffy dressed, aristocratic British accent spoken, never losing his suntan, most eligible 50-something bachelor, Microeconomics 101 Professor Bixley: "My goal in life is to die with my debts maximized. Cheerio!"

7. Steve Leslie on February 5, 2009 1:52 am

   Most of my writings and perhaps my life are meaningless platitudes. Yet my point is imperfect strategies abound because we are imperfect. And only Madoff had a perfect strategy except for the part about getting away with the scheme.

8. david higgs on February 5, 2009 6:40 am

   Or one could read "The Little Book That Beats The Market" by Joel Greenblatt, and suggested by Steve as in DCA this might be a nice time to employ… maybe

9. Steve Leslie on February 5, 2009 10:31 am

   I promise no rant: To Larry and the Doc.

   A few scenarios where DCA works and how to use it. buying company stock in a 401k. Before the implosion of Enron, Citi, Home Depot and others, many people retired millionaires as a result of DCA into their company stock. There are clerks at Wal-Mart and secretaries from IBM who now live very comfortably. So the system can work provided you work for a company not engaged in financial shenanigans. The tax law used to be that after 59 1/2 you can remove the company stock and it is treated as ltcg rather than ordinary income. Check with your tax advisor on this one. I have Morgan Stanley in my 401k and although the stock is way down from its high of the 80's in '07 the dividends are being reinvested into more stock. Hopefully when I plan on taking money out the shares will be much higher.

   Another is in an Annuity. Let's say that you want to make a lump sum investment into an annuity. Put it in the fixed account and DCA the money into the sub-accounts over weeks, months and even years. This strategy eliminates the pressure of deciding when to invest the money and to at least commit oneself to an investment plan.

   A third is to buy a mutual fund, and reinvest dividends and capital gains, a popular strategy. This is a form of DCA.

   With great respect to Larry; of course you will make more money if the investment is higher than the average cost of shares when you cash out. However, if you are DCA you want the shares to remain low during the investment phase. The philosophy I believe is predicated more on behavioral psychological factors than market factors and one has at least an investment plan which should be better than no plan at all.

   See that was not painful unlike waking up to wind chill of 20 in Melbourne Florida. Now I could rant on this if u like.

10. Adam Kretschmann on February 5, 2009 9:23 pm

    It's interesting to ponder how we might act if perfection was possible. I'm currently reading In Search of Perfection, a cookbook by British Chef Heston Blumenthal after watching the BBC series of the same name. In the book Heston seeks to "perfect" some popular dishes like Treacle Tart and pizza. His method is interesting combining taste testing, a survey of historical recipes and scientific literature to produce his own take on the perfect recipe. I wonder if it might be possible to dissect the perfect trade (Soros's bet against the pound?)

11. Anton Johnson on February 6, 2009 9:33 am

    Perhaps one seeking profits should short the ultra-long rather than go long the ultra-short, and logically the converse, particularly when experiencing moderate to high volatility.