Dollar Cost Averaging
For those of you who don't know what DCA is
http://www.investopedia.com/terms/d/dollarcostaveraging.asp
I have always heard from many analysts that DCA is a good way for long term investment because you capture both the high's and low's as you invest.I think this idea is being propagated because of the fact that people in US do not have the saving mentality and it is just to force them to save.
But isn't it common sense that it makes more sense to just buy during the dips rather than ALL the time during a prticular year? I understand that it is tough to spot a bottom of a market. But still wouldn't it just make sense that you invest everytime the market dips x% even if you are just going to invest in indexes.
I am not a financial expert by any means. But personally i have seen this effective.Just have a game plan on how much to invest in what index when a market dips every X% or so and keep doing it.Try it out. It seems much effective than DCA.
Of course some indexes have a much higher standard deviation than others.e.g Emerging market indexes fluctuate more than a US large cap index. So adjust your percentages accordingly.
I have seen lots of articles trying to prove that DCA is not very effective.I totally agree with that. But for us working class who invest in 401k thru' work, our only option is DCA. We can probably work around that by increasing the % when the market is in downturn and just have a min % to get our company match other times.
What do u think?
5 comments:
just have a min % to get our company match other times.
Is this some sort of option from your employer?
If you excuse me, your advice on investing when the market dips is rather naive. You equally also take the risk of getting caught in a bear market. You would not know whether to short or long unless you are sure about your fundamentals.
Anyway, DCA by reading about it, does not sound like a bad strategy for personal investors. On the face of it, seems like it is perfect to beat a short-term volatility on the market.
For long term investment, my advice would be... make your basket with less volatile instruments (find volatility from real value i.e. less inflation) and also don't forget to diversify.
Disclaimer: I am not an investment guy and I may have got it all wrong.
I think i should have made it clear that this theory is mainly for index funds. Not common stocks.
Also this is for long term and not short term. All i am trying to say here is that instead of buying INDEX funds in a regular frequency, buy it when it dips.
Buying INDEX funds will automatically ensure diversification.
I apologise for being so vague in my post.
All i am trying to say here is that instead of buying INDEX funds in a regular frequency, buy it when it dips.
I still think, buying at regular intervals is better than buying it at dips. If it is less volatile and starts to dip, it really means something horribly going wrong with the fundamentals -- sell comes to mind rather than buying. Well anyway its just me.
That's fine. You should stand up for what you feel is right.
Also beware of stock spams
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