DCA'ing into the sp500 index

[maddythebeagle]

http://biz.yahoo.com/usat/060713/13639559.html

comments on this article? Something that I have been thinking about....I think most people here have learned to slice and dice and not all in sp 500....I am not sure that the sp500 is a good example for this article considering how large cap stocks got out of control a while back.....

 

[unclemick]

One word - before I go "visiting"

DeGaul

S&P 500 is fine - if you are young - don't have a lot of money at one time and a have say a 20 yr horizon. A little bit at a time, over a long period of time, starting early in time works wonders.

BTY - They don't say: Pass by your house in MO. And they go shopping instead of making groceries.

Go figure.

heh heh heh

 

[d]

the article is basically restating: buy low.  if markets are moving up, it's good to get in early, if moving down, get in late ... don't think there's much brain work here.  

my take on the S&P is that it is a broad market index, but not the only one. my personal preference in the wilshire 5000. when large caps shine, one does better; when they sink, the other does better.

slice 'n dice is nice, but if you have the wrong allocations ...  

 

[Mwsinron]

Well if you retire at 60 and plan to live to 80 something. Thats a long time

 

[Alex]

the article is essentially worthless.

But dollar-cost averaging isn't the panacea it's made out to be. For example, if you had invested $100 a month in the Vanguard 500 Index fund for the past decade, you'd have had $15,437 in your account at the end of June, according to Lipper.

You'd have invested $12,000 in the fund, so your total profit would be $3,761, or 31.3%. Any gain is good, but 31.3% is a far smaller gain than 122% - the S&P index's return in the past decade.

No sh*t sherlock! If I had 12K to invest as a lump sum I certainly wouldn't take a decade to DCA it in $100 monthly nuggets! People that invest using DCA are systematically saving money as they earn it.
I love this part:

If you were looking for an easy way to boost your returns over time, dollar-cost averaging probably isn't it. The stock market generally rises over long periods. That being the case, you'll usually do better investing all at once, as long as you're investing for the long run.

Brilliant! : i feel so , enlightened! : Here is a pearl of wisdom that goes equally well: If you want to become Financially Independent it is best to start with a few million dollars.

 

[sgeeeee]

I think this article is simply trying to clear up some common misconceptions. Unfortunately, it isn't as clear as it could be. You don't have to limit yourself to S&P 500 to see through some of the misconceptions about DCA. Some people believe that DCA is a good approach to maximize returns. I've read financial advice that says it makes sense to DCA because you buy more shares when they are down and fewer shares when they are up -- so it is inherently a buy low technique and will improve your returns. This is misguided and wrong.

In reality, for any market that has a long term increase in value, DCA is less profitable than simply buying in a lump sum as soon as the money is available to invest. Since the market goes up more days than it goes down and it's increases are generally higher than it's declines, the odds of achieving maximum gain are always in your favor to buy as soon as possible.

DCA does accomlish two important things: 1) it reduces risk. If you buy all at once, the risk that you suffer an immediate and sharp decline is real. If that happens you bought at a high point and may have to wait a long time to come out ahead. You can play the odds and still lose in a big way. DCA reduces that risk. By putting money in the investment over time, you insure that you don't buy all your shares at the highest point. Your average purchase price is guaranteed to be lower than the highest point. 2) it establishes an investment discipline that is important. Most people don't have a large lump sum sitting around to invest. They get a pay check periodically. If you have already made an investment decision by establishing a DCA strategy, it keeps you from over-thinking how to invest each payday. You don't sit on the sidelines wondering whether to wait for some event or change in the market. Most people who DCA are effectively choosing to lump sum invest every payday.

 

[cute fuzzy bunny]

Succinctly? If its obvious that things are cheap, buy. If they look expensive, sell. If you're not sure, DCA...

 

[mathjak107]

dollar coast averaging usually produces much lower returns than taking your money and plunking it in and rebalancing every year or 2 ..since the markets move up 67% of the time and down only 1/3 odds are you will not do as well........you would have to be extremely un-diversified and narrowly invested for it to pay off better

 

[mathjak107]

buying when prices are lower than your average cost is a better idea

 

[Alan]

I say that I DCA and that it works, but in reality I am paying myself through auto investing so I don't get a chance to spend it.  I put the the max 20% per month into my 401(k) rather than spread it out over 12 months 'cos if I lose my job, or decide to chuck it in I don't want to have missed the chance of maximizing the 401(k) benefit.  Each year when I get a bonus or if I get a tax refund I always invest as a lump sum. 

I've never done the math when (or retrospectively) I receive a lump sum to see if DCA'ing would be better (or would have been better).  I always think that the least risky move is to get it into my RE funds as quickly as possible.

BTW - my company match continues all year even after I have max'ed out.  If that was not the case then averaging over 12 months would be better.

 

[LOL!]

The article is not so much about the S&P500 index as it is about DCA vs LumpSum.  Of course, the latter has been studied and LumpSum is better about 65% of the time.
Here's the study:

http://www.fpanet.org/journal/articles/2004_Issues/jfp0604-art11.cfm

As previous posters mention, the question of LumpSum vs DCA comes into play when you have a lump sum, say from selling a house, selling a business, inheriting some money.  It does not really come into play if you are taking  money regularly from a paycheck to invest.

 

[maddythebeagle]

Some people believe that DCA is a good approach to maximize returns.  I've read financial advice that says it makes sense to DCA because you buy more shares when they are down and fewer shares when they are up -- so it is inherently a buy low technique and will improve your returns.  This is misguided and wrong.

Agreed.

Succinctly? If its obvious that things are cheap, buy. If they look expensive, sell. If you're not sure, DCA...

but that wouldnt have been a long enough article.