Lump sum vs. Dollar cost averaging

[RedJoker]

There was a discussion about this before. Here is a link. I think the conclusion was that improving your asset allocation is superior to DCA if you are looking to reduce risk.

[DcifrThs]

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I haven't read the whole thread and I am not an academic but noone has talked about the reason I have used DCA at times when putting significant sums to work -- it's emotional. I will just be so pissed if I pick a bad time that I prefer the averaging.

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but your choices have been actively managed. not passive allocations..am i right?

thanks,
Barron

[Tater10]

DCA vs Lump Sum is a Suze Ormanizm:

Person A: I have $X to invest, but I worry I am buying at the top.

ME: I would say you don't have $X to invest.

If you can't handle losing, trading is not for you. Buying at $10.50, $11 and $10 is the same as buying the whole thing at $10.50. You now lose the exact same when the stock goes to $6, except you have extra commissions and extra tax calculations.

[CrushinFelt]

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I haven't read the whole thread and I am not an academic but noone has talked about the reason I have used DCA at times when putting significant sums to work -- it's emotional. I will just be so pissed if I pick a bad time that I prefer the averaging.

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but your choices have been actively managed. not passive allocations..am i right?

thanks,
Barron

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passive allocations... basically just chuck it in there (ie if you're investing in a fund that is 70/30 stocks and bonds as a retirment account, there's no real point in doing DCA because the long-run will so heavily outweigh the short-run)

active you want to chuck it in there as well, but not with 100% of the trade unless you are VERY sure of your timing. If a stock is at 50 and you think it will go to 60 in the next 6 months and you have $5000 you want to put in it, it may be smarter to put in $4000 now and then wait 2 weeks to see what happens because you're unsure of what it may do in the short-term. DCA is basically an insurance policy, like someone said, against the short-term movements of an investment that is not extremely long-term.

[ahnuld]

desert cat,

I remeber reading a post of your where you talk about a find you had where it dropped after you bought it and you used margin to buy more because you had an idea of the instinct value being much higher than the price at the time. Wold this qualify as DCA or something else?

[DesertCat]

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desert cat,

I remeber reading a post of your where you talk about a find you had where it dropped after you bought it and you used margin to buy more because you had an idea of the instinct value being much higher than the price at the time. Wold this qualify as DCA or something else?

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DCA is buying the same amounts at regular intervals. Buying more of an idea that's gotten cheaper is just "averaging down".

The benefit of regular intervals is if you don't have a good idea of the real value. The regular intervals means you buy at the average price over the periods. Since you are using the same fixed amount to buy shares each period your average cost will be lower than your average purchase price. That's a nice benefit when you "know nothing" and have no idea how to pick an entry point.

When you average down you've bought some, but it just keeps getting cheaper. If it's substantially cheaper probably throw everything you've got left at it, after all if you liked it enough to buy at the higher price you'll probably want to max your allocation at a significantly cheaper. Of course it may continue to get cheaper and you would have missed an even better buying opportunity, or you may have been way wrong about it's intrinsic value, then you say "ouch". Hopefully it goes up right after you finish buying and makes you feel like a genius.

[gull]

Dollar cost averaging is sub-optimal. Sure, it has less risk than lump sum, but there are more effective way to decrease risk.

Consider the following: You have a portfolio of 100% cash. Every month, you increase your allocation to stocks by 10% and decrease your allocation to cash by 10%. After 10 months, you have 100% stocks. This strategy is retarded. A portfolio of 50% cash, 50% stocks is not on the efficient frontier.

An investor wishing to limit his losses should use a more conservative portfolio instead.

[Scorpion Man]

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I haven't read the whole thread and I am not an academic but noone has talked about the reason I have used DCA at times when putting significant sums to work -- it's emotional. I will just be so pissed if I pick a bad time that I prefer the averaging.

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but your choices have been actively managed. not passive allocations..am i right?

thanks,
Barron

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Some of each...more active than passive...but basic premise is still there. If you buy a lot of actively managed stocks (long) at the same time its close enough to the same problem.

[RikaKazak]

This is how I do it:

If I like a particular business or sector...but not following it daily etc. (just generally like it and generally like the price) I DCA.

If I'm following daily, AND I have a "good reason" to suspect "win, win, win" type pattern...then I lump sum.

Basically default is DCA, with "lump summing" if I have a specific reason.