What’s your take on your PA? Do you dollar cost average or just throw in a big lump sum. I’m not smart enough to time the market so I don’t even try.
Bonus season is amoung us and I want to get a feel for how AF Financiers fund their PA. The end investments would be the same regardless, it just depends how it’s bought in through 2013.
Looks like someone is expecting big bucks this year. Anyway, apparently, historical data shows that it is better to just throw in all your money immediately. While dollar cost averaging helps you “buy more shares at lower prices”, simply throwing in all the money at once gives you more participation time in the market. In other words, if you assume that the market goes up on average, it is advantageous to have your money in the market as soon as possible.
Of course, this is subject to other factors, but I’m just putting what I read here.
Depends on how much and what kind of stock I’m buying. If it’s a growth/momentum stock I tend to dive in. Wait and you miss the boat. With value stocks I’m much more price sensitive…probably to a fault.
Maybe growth vs value still isn’t the way to think about it actually. If I have high expectations for a name that’s trading at $80 I don’t really care if I buy at $75 or $85. On the other hand, as we speak I’m slowing buying some dividend payers - PFE, KMB, CVX - and for I’m not looking for huge price appreciation so I like to be more comfortable with my entry point. That may mean DCAing in or just waiting until my target entry point hits and pulling the trigger. That’s when the amount of money I’m dealing with comes into play.
PFE is a good example of me being too patient. I’ve been waiting for a pullback for months and instead it just keeps melting up. I’m not particularly comfortable buying it at its 52-week high so I’m left on the sidelines.
I’m talking about funds since the compliance witches like to flap their arms in a furry when you put in a request for individual equities. Funds are pretty much a slam dunk for approval.
Ah, in that case it really doesn’t matter, IMO.
Personally, I use DCA in this environment… If the sky was clear and if we were in the middle of a secular bull market, I would plunk everything in.
I know the stats say to get it in as fast as possible, but I have felt more comfortable averaging in personally. I’m douchey like that sometimes.
We are in one which has been for going on 4 years now.
We are still in the end of slump/recovery phase, even though the market is up 100% from lows (due to QE, not strong fundamentals). I wouldn’t be surprised if the market tanks one more time in the next few years before a true, sustainable bull run starts. Secular cycles last 20 years.
How do you know when you are in a 20-year run up?
If you are diversified and rebalance, go ahead and plunk it in.
Dollar cost averaging is more about telling people that they don’t have to save up a large chunk before investing, that putting in a bit at a time is fine and has certain advantages.
Most people don’t actually receive large portions of their income in the form of bonuses, or bonuses at all.
I would say go ahead and DCA into the market over the next year. Let’s say after taxes and whatever spending spree you treat yourself to, you’ve got $24k. Put in $2k/month into your various funds every month. You’ll make your last investment this time next year, when you’ll be facing (hopefully) another slug of cash from your bonus for 2013.
This plan is nice because you keep cash on the sidelines and if the market does completely crap the bed and drops 15% over a few month period, you can accelerate your investing schedule to take advantage of lower prices and won’t have invested 100% when most stocks, funds, ETFs, etc. were much higher.
The worst case scenario here is if the market does nothing but go up steadily, every month, for all of 2013. In this case, yep, you missed out by not investing your full $24k in early January. However, I think that’s a better “worst case scenario” than the reverse, which is plunking in all your money in early January and then having a year like 2008 where the averages are 37% lower or whatever when December rolls around.
The other thing to consider that we’re not really factoring in is the discipline required to DCA. If you’re thinking about manually investing $2k every month, forget it. Approximately zero people have that kind of discipline long-term (my guess is you’d make it to about March, at which point the siren song of market timing would be screaming in your ear so loudly that you’d give in). That’s not a swipe at you, CFAvsMBA, I’m just pointing out that manually investing your bonus like that every month requires insane amounts of discipline. For that reason, if you’re gonna DCA, be sure to set it up to happen automatically in your brokerage account - I think most major discount brokers make it pretty easy.
^ Respect.
I guess I have two things to add:
“Worst case” scenario is worth thinking about, but we should also consider the probability of each worse case. That is, do you believe there will be another 2008-style crash this year or do you believe that the market will just bounce around some general long term trend?
To some extent, even if you throw in all your money at once, you are already “averaging” your investments, since you get paid yearly. That is, if your career is 20 years, you already average your investment over 20 periods. So in the greater scheme, the question of whether or not to space out your money within each year might be somewhat less significant.
Yes, you average in slowly if:
OR
If you are diversified, then part of your investment may suffer a correction, but the other part will probably not, and then when you rebalance, you’ll sell the thing that did well (at a profit, probably) in order to buy the thing that didn’t (and therefore get the same lower price that you would get if you had dollar cost averaged). You may not be able to deploy all your capital at that lower price, but the long-term upward trend in the market is the cost of carry (minus the cash rate, which is close to 0% now) if you hold cash while doing DCA.
Again, DCA is more about the value of taking a bit out of each paycheck and applying it to your long-term portfolio and not having to worry about doing a separate valuation analysis every month or year when you invest. Of course, if you are good at doing valuation analysis, go ahead and do it, but the DCA mantra is partly there to keep mom and pop from delaying investment simply because they are not professional investment researchers and are afraid of what the market might do in the short run.
Part of the reason that diversification is important to the answer is that dollar cost averaging is also a kind of diversification. Basically, through DCA, you are diversifying your investment across time instead of across assets. If you have a less diverse position (like you’re only in equities or an industry or something), then the diversification across time reduces your risk of buying in at inappropriate valuations by spreading out the fluctuations in valuation and can help mitigate (somewhat) the fact that you’re not really all that diversified.
However, if you are already diversified across assets that are driven by separate risk factors (which generally means different asset classes, although to a lesser extent it can also mean different industries, or cap sizes), then the additional benefit of diversifying over time is less and the opportunity cost of being out of the market is higher in relationship to the diversification benefit that DCA offers.
When you rebalance, you’ll be getting some of the same benefits of DCA anyway… you’ll be selling more stuff at higher valuations and buying stuff at lower valuations. Generally, this is a good thing, although if things strongly trend, then it’s not quite as good. With DCA, you do buy more stuff at lower valuations, but instead of selling stuff at high valuations and rotate into the low valuation stuff, you just buy less of high valuation stuff.
So ask yourself if your portfolio has some major risk factor that everything is correlated to. To the extent that this factor explains a lot of the portfolio’s return, you may want to spread out the investment. However, another way to approach it is simply to look for an uncorrelated (or negatively correlated, if you can find it) asset and plunk it all in at once.
If the market is down, plunk it in.
If the market is up, wait until it is down, then plunk it in.
For more information, read “Yes You Can Time the Market” by Ben Stein and Phil DeMuth.
^I’ve dabbled with RSI and MA, but hardly saw much in terms of gains over the long haul. Can you explain how you determine ‘down’ and ‘up’ markets?