I often read from the Early Retirement Extreme blog, but I found this article to be a little disheartening since I am an index fund investor.
IIRC, Jacob buys equities when the dividend rate approaches 5% and sells when the rate approaches 3%. He's also traded options in the past (selling covered calls) although I don't know if he still does that. So the only challenge is finding equities yielding 5% that will someday appreciate to a yield of 3%. Yup, that's all.
Here's some cheery counterpoint to consider with the shorter-term thinking of that article:
The Buffett family is cheering because the price of [-]equities[/-] hamburger has dropped, yet most burger-eaters have run away screaming to put their money in CDs, TIPS, and gold funds.
I agree that B&H looks pretty crappy when considered over a term of a decade. Yet the last 10 years have been in pretty short supply over the last 30 years, and most of today's active retail investors haven't known anything other than a bull market. The investor's psychological phenomena are "recency" and "anchoring", and they can be pretty discouraging when they're focused on Dow 14,000.
DCA's strongest advantage is that it imposes a savings discipline on the investor. It probably matters less what the investor chooses to invest in as long as they have a pile of shares when the market takes off. Kinda hard to play catch-up after the market has started rising.
Asset allocation can also be your friend by forcing you to put your money where the market's underperforming. Again you've accumulated a pile of cheap [-]sh!t[/-] shares when the market takes off.
Another aspect of the two to consider is value averaging-- put the month's DCA dollars in whatever's doing worst. Take dividends in cash (instead of reinvested shares) and move them to lagging assets.
Another benefit to B&H is that it minimizes expenses by reducing trading costs (and bad spreads) as well as taxes.
It's probably unrealistic to expect that the majority of individual investors will ever learn how to pick market trends, let alone stocks. This is assuming that individuals even have the time to study the skill, let alone the capability to develop it. But we can all be expected to learn how to exert control over our savings rates, our sleep-at-night asset allocations, and our investment expenses.
So, yeah, B&H can be pretty discouraging at times, but it's better than the alternatives. "Disheartening" might be an indication that it's time to look at the ER portfolio's asset allocation or the ER budget/expenses or ESR.
If you want good news about B&H, it's that our ER portfolio is 50% higher over the "lost" decade. We haven't been adding to it during my ER, either-- just reinvesting most of the dividends. The part of my portfolio that I used to actively trade (using a number of widely-accepted strategies) hasn't done much better than money markets (but with sickeningly higher volatility). I was getting better, too, but I was also getting tired of having to put in all that work for "just" a few extra percentage points. Meanwhile the assets in our ER portfolio did better the longer I ignored them.
