Comments on: Don’t Give up on Dollar-Cost Averaging!

By: Andy

Andy — Fri, 10 Apr 2009 13:24:23 +0000

Hi JLP, sorry to dig up this old post/thread. I was doing some Google searches and I found your blog (nice!). If I can ask a few basic questions (warning: I’m an investing newbie). In your reply to “Average Schlub” you mention the numbers “-14.04%” and divide “204 by 365″. May I ask where did you get those numbers from. When I look at the example/illustration you worked out in the main part of the post, I don’t see these numbers anywhere. I am basically trying to understand why your DCA Annualised return of -22.68% is worse than a lump sum return (111.94-135.15)/135.15= -17.17%. I am sure I am doing my sums wrong. Can you kindly correct me? I’ll learn a lot. I’ve already learnt a lot from your site. Many thanks

By: Finn

Finn — Tue, 22 Jul 2008 19:02:07 +0000

I believe that research has shown DCA to be less effective than full investment the majority of the time. There is nothing special, and quite the opposite, about DCA on its own. The ‘real’ advantage to DCA comes down to investing as much as possible as soon as possible (always assuming that the investment averages positive), not in spacing out your investments.

Likewise, you shouldn’t stop investing at any point – not because of DCA, but because you want to be fully invested as soon as possible.

By: JLP

JLP — Tue, 22 Jul 2008 17:51:28 +0000

Average Schlub, Keep in mind that the XIRR function is an annualized number. If you annualize -14.04%, it becomes -23.71%. [(1 - .1404)^1/(204/365)] - 1 [.8596^{1/(0.55890411)}] - 1 [.8596^1.79] - 1 0.7629 - 1 -.2371 or -23.71%

By: Average Schlub

Average Schlub — Tue, 22 Jul 2008 17:26:32 +0000

I’m certainly familiar with DCA as an investment system and I’ve been led to believe it’s merits. I think the only alternative is to time the market and that has an elusive endeavor for myself. What I don’t understand in your example is how your personal rate of return could be any worse than the YTD performance seeing as how the highest price was at the start of the year and the lowest price at the end. If you DCA’d then you bought some shares at prices in between so there’s no way it could be worse than an initial $7000 investment at $135. You sure you ran that Excel function correctly?

By: JLP

JLP — Tue, 22 Jul 2008 17:24:02 +0000

Wilson said:

“JLP: you are permabull. You don’t know what’s happening to this world:)”

No, I’m not a permabull. I do think that over the long run, the market will trend up and not down. That doesn’t make me a permabull. I realize that we could have long stretches of time when the market does poorly.

I’m still trying to figure out what you are.

By: Wilson

Wilson — Tue, 22 Jul 2008 17:00:56 +0000

JLP: you are permabull. You don’t know what’s happening to this world:)

By: No Debt Plan

No Debt Plan — Tue, 22 Jul 2008 16:17:36 +0000

Then again, if the price went from $111.94 to $125, that’s an 11.6% increase by my calculations. Possible? Yes. Overnight? No.

Of course if you kept on DCA while prices are lower then the price it needs to go to to get you in the black is smaller.

By: JLP

JLP — Tue, 22 Jul 2008 15:12:46 +0000

Don,

I think it’s Wilson’s mission to refute ANYTHING I say on this blog.

Wilson,

Are you familiar with the concept of asset allocation and rebalancing? By rebalancing, you are selling off those positions that have risen (devesting) and purchasing more of those that fell behind in the allocation.

By: Don

Don — Tue, 22 Jul 2008 13:05:11 +0000

“nice scheme. The problem is, the investment advisers don’t call for dollar cost devesting while the market is rising.”

Perhaps they don’t, but any advisor worth anything will encourage rebalancing. A balanced account with other asset classes would not have seen the same drop as an account solely invested in the S&P 500.

People do in fact tend to do dollar cost devesting when they come to retirement age. That is, they tend to take regular distributions over time.

Personally, I’ve made this observation. Dollar cost purchases get you in at the harmonic mean of the market price. The harmonic mean is smaller than the usual “average” most of us are familiar with. All other things being equal getting in at the harmonic mean and out at the arithmetic mean would be a good thing. It could be better to cash out, not in equal dollar amounts, but in percentage amounts.

Perhaps something to think about. Perhaps not.

By: Wilson

Wilson — Tue, 22 Jul 2008 05:52:36 +0000

nice scheme. The problem is, the investment advisers don’t call for dollar cost devesting while the market is rising.
To make things worse, the market will crash anytime!