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I just had one of those Duh moments. The previous thread made me actually think a bit about my investment schedule. Since I opened my Roth years ago, I have had an automatic investment each month for 1/12th of the IRS limit for that year. Rationally or not, I preferred to DCA even though I theoretically was lowering my returns by not being fully invested throughout the year even though I have become more affluent and could contribute the full amount on January 1st if I chose.

Well, the Duh moment is that I could still contribute the full amount into the account on the 1st into a MMF and still DCA into equities if I choose (after all, I'd be sitting on cash anyway as it slowly was deposited in the IRA throughout the year). So, for the past 6 years or so (guestimating when my cashflow would easily allow me to lump sum contribute) I have been paying more taxes than I had to. Doh! This Jan, I will open an MMF in my IRA and transfer the full amount.

In 2007, I contributed (or will soon) the full $4K in $333.33 chuncks. So, my average annual taxable balance was about $2K. Sitting in a MMF fund earning 5%, my taxable interest income would be $100 higher; of which the IRS will gladly confiscate at least $25! Compound this over the last few years and I've lost hundreds of bucks! Tisk, tisk.

Learn from my mistake people... I did.

FoolNBlue (Really hates playing the tax game but that's another post... www.ronpaul2008.com)
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>> Well, the Duh moment is that I could still contribute the full amount into the account on the 1st into a MMF and still DCA into equities if I choose (after all, I'd be sitting on cash anyway as it slowly was deposited in the IRA throughout the year). So, for the past 6 years or so (guestimating when my cashflow would easily allow me to lump sum contribute) I have been paying more taxes than I had to. Doh! This Jan, I will open an MMF in my IRA and transfer the full amount. <<

Just one note: this assumes you invest in mutual funds and not individual equities. DCAing with individual stocks for $333.33 at a time ($416.66 at a time in January) would be a killer with all the commissions on those small trades, even at only $10 per trade or less.

#29
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Just one note: this assumes you invest in mutual funds and not individual equities. DCAing with individual stocks for $333.33 at a time ($416.66 at a time in January) would be a killer with all the commissions on those small trades, even at only $10 per trade or less.

I am almost exclusively a mutual fund investor these days (individual stocks are only about 7% of my NW). -Lack of time and energy to find good companies -and even harder to find them at a price I'm willing to pay as fast as my savings come in. Other than dividend reinvestments I do not automate purchases of individual equities. I do a fundamental analysis and use a DCF model to determine the price I'm willing to pay... works well when I have the time to do it. -I'm sloppy on the selling though (should've sold C a few years ago and probably still should).

FoolNBlue
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Rationally or not, I preferred to DCA even though I theoretically was lowering my returns by not being fully invested throughout the year even though I have become more affluent and could contribute the full amount on January 1st if I chose.

I guess the question is how to know which is best to do -- put it all in at the first of the year, or DCA month-by-month. There's really no way to know, is there? Depends on the market. The last few years we've been putting it all in at the first of the year. I've been planning to do this for 2008 as well. Is Jan. 2, 2008 (a Wednesday) the first day we'd be able to make the transfer?

--AF
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>> I've been planning to do this for 2008 as well. Is Jan. 2, 2008 (a Wednesday) the first day we'd be able to make the transfer? <<

Going from one financial institution to another, yeah, probably so. Moving money from one account to another within the same institution can often be done 24/365, except for when their online banking site and/or telephone banking system is down.

#29
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I guess the question is how to know which is best to do -- put it all in at the first of the year, or DCA month-by-month. There's really no way to know, is there?

If you believe the market is going to go up, DCAing does not make sense - you should put ALL the money into the market NOW.

If you believe the market is going to go down, DCAing does not make sense - you should put NONE of the money into the market NOW. Hold your money in cash-equivalents until you think the market is going to go up, and THEN put ALL of the money in.

(Note: I'm assuming a long-only strategy here.)

If you really have no idea and don't want to study enough to form a reasoned opinion or actively time the market, the best approach is to bet on the long-term average - which is that the market goes up, so you should put ALL of the money into the market NOW.

If you are into actively timing the market, DCAing does not make sense - you should put the money in, or not, according to what your timing strategy says, not according to the calendar.

(Another note: just because you don't plan to buy stocks (or stock funds) now, is no reason not to move IRA money into the IRA.)
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<<If you believe the market is going to go up, DCAing does not make sense - you should put ALL the money into the market NOW.

If you believe the market is going to go down, DCAing does not make sense - you should put NONE of the money into the market NOW. Hold your money in cash-equivalents until you think the market is going to go up, and THEN put ALL of the money in.

(Note: I'm assuming a long-only strategy here.)

If you really have no idea and don't want to study enough to form a reasoned opinion or actively time the market, the best approach is to bet on the long-term average - which is that the market goes up, so you should put ALL of the money into the market NOW.

>>


Sure. Take the PLUNGE!


There are occasions where I will do just that. But rather more often, I prefer to diversify investments in a stock by making a series of purchases over time ----diversifying through time.



But help yourself to your own style.



Seattle Pioneer
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If you really have no idea and don't want to study enough to form a reasoned opinion or actively time the market, the best approach is to bet on the long-term average - which is that the market goes up, so you should put ALL of the money into the market NOW.

Well said. The DCA effect is a useful side-effect of a regular investing plan, but that effect should never be chased as the major component of a strategy. Since the market on average goes up over time, you're always better off investing as soon as possible. Only if you don't yet _have_ the money you want to invest, but plan to accumulate it over time, does DCAing make sense.

- Erik
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Since the market on average goes up over time, you're always better off investing as soon as possible. Only if you don't yet _have_ the money you want to invest, but plan to accumulate it over time, does DCAing make sense.



Another way to think of DCA vs. "All in" is DCA will on average result in lower gains but also lower losses. On the other hand "All in" is like gambling in Vegas with one very important difference. You are the house. In Vegas, the odds are with the house, and you are likely to lose. In going "All in" to the market, you are the house, and you are likely to win, but sometimes you won't. Just like sometimes you make money in Vegas, sometimes you will lose money going "All in" to the market. Putting all your money in at once vs. DCAing it is a gamble where the odds are in your favor. Want to play it safe? DCA it, willing to take a little extra risk, go all in.

I actually DCA my Roth investments into my taxable account though out the previous year, then on Jan 2nd, I tranfer the amount into the Roth and purchase different "items" based on my pre-selected asset allocation. (Cash / BKT / DIA / DVY / EFA / EWJ / XBI / ICF / IJR / QQQQ / SPY) What I sell from my taxable to make that happen varies, but I use it as a rebalance act. Its complex because I try to hold certain things in my Roth and other items in the taxable, (bonds vs. stocks vs. cash vs. Dividend payers)... So I don't DCA my Roth at all, the only reason I DCA my taxable is because I don't actually have the money until I have the money :)

When I sold my house and had 50K of proceeds available I immediatly spread the money into the asset allocation and went to bed. :)

Having a preselected asset allocation model you are trying to match makes investing a "simple" thing. I use to do the individual stocks, and would spend 20+ hours a week researching and tracking. The first 7 years or so, I enjoyed it, it was fun and exciting. I was beating the market, it was a thrill.... Then I got bored, and started spending almost no time reseaching and tracking.. and instead I spent my time worrying and not sleeping so well. :)

These days I just plug my spreadsheet, it tells me buy this, sell that. When the numbers reach a certain size (2% or 5K above or below the expected allocation amount, I rebalance... or when I'm moving money to the Roth accounts). Otherwise I just just make comments like "Last month I lost a Lexus , this month so far I've gained a Hummer". It makes investing fun again because I don't actually spent any time on it.

Laters,
-d.
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Want to play it safe? DCA it, willing to take a little extra risk, go all in.

The big conceptual problem I have with DCA as an investing strategy (as opposed to a discipline to force oneself to actually put income into investments), is - what's so special about the money that's already in there, or about the money you do NOT plan to put into the market this month, or about now as opposed to later?

If you have, say, $100,000 in stocks, how much protection are you really buying by investing an additional $1,000 a month for 12 months, as opposed to $12,000 now? If you assume the slower pace makes sense, shouldn't you pull out 11/12 of your existing investment, and put IT in slowly over the following 11 months?

For that matter, consider the $1,000 you plan to invest this month. Shouldn't you average it in over the next 12 months, just like the $11,000 you are holding out?

And there's nothing special about NOW, either. Shouldn't you start over again next month?

Reductio ad absurdum, because there's no apparent reason to stop anywhere shy of absurdum, the DCA investor should never invest a single dollar in whatever he's averaging into.
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<<If you have, say, $100,000 in stocks, how much protection are you really buying by investing an additional $1,000 a month for 12 months, as opposed to $12,000 now? If you assume the slower pace makes sense, shouldn't you pull out 11/12 of your existing investment, and put IT in slowly over the following 11 months?
>>


Nope I don't think so.

You are making assumptions that you know what is going to happen. I use DCA when situations have a degree of ambiguity. In such saituations, diversifying your investments over time makes good sense, in my view.



Diversification is often a useful strategy to manage risk. I think that applies to spreading your purchases out over time, just as it can apply to buying into several diferent kinds of investments.




Seattle Pioneer
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<<If you have, say, $100,000 in stocks, how much protection are you really buying by investing an additional $1,000 a month for 12 months, as opposed to $12,000 now? If you assume the slower pace makes sense, shouldn't you pull out 11/12 of your existing investment, and put IT in slowly over the following 11 months?
>>


Nope I don't think so.

You are making assumptions that you know what is going to happen. I use DCA when situations have a degree of ambiguity.


I don't see where I am making any assumptions at all. I see where the person who DCA's is making ONE assumption in regard to money already in the market, and a DIFFERENT assumption in regard to new money. In doing this he's allegedly buying some small protection for the new money, but leaving the (potentially much larger) old money with no protection at all.

An analogous behavior would be to plan to build a new garage, and buy fire insurance your house - but only up to the value of the new garage, and expiring as soon as you finish building the garage.

I'm saying that this is silly - that the person should make ONE assumption about a possible investment and invest accordingly; if worryingly unsure of that assumption, the person should choose appropriate hedges covering the ENTIRE investment, not just the newest bit of it.

What that assumption should be - that's up to the person in question.
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<<An analogous behavior would be to plan to build a new garage, and buy fire insurance your house - but only up to the value of the new garage, and expiring as soon as you finish building the garage.
>>



Since you persist with thinking in caricatures, further efforts to discuss this issue is pointless.


Making lump sum investments isn't a bad strategy. I happen to think that DCA can have advantages when the decision to invest is somewhat more ambiguous.


But you are certainly welcome to your own methods.



Seattle Pioneer
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Making lump sum investments isn't a bad strategy. I happen to think that DCA can have advantages when the decision to invest is somewhat more ambiguous.

warrl hates DCA and makes sure anyone who uses the acronym knows it.

In a situation where you think the market will bounce around with no net gain or loss, DCA may make sense. With DCA, volitility and zero gain will equal a gain. It doesn't matter much anyway. After all, lump sum is "market timing" too.

One good point is DCAing is pretty silly, even if you agree with the strategy if the % being invested is miniscule compared to your overall portfolio. As mine stands, day to day swings affect my portfolio more than my monthly savings.

FoolNBlue (A little sorry he said DCA... nah, not really)
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>> After all, lump sum is "market timing" too. <<

If you "time" the investment of the lump sum because you think it's a decent time to invest given the current market, yes, it's still a form of market timing.

If you immediately invest a lump without regard to market conditions, I wouldn't consider it market timing.

#29
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In a situation where you think the market will bounce around with no net gain or loss, DCA may make sense. With DCA, volitility and zero gain will equal a gain. It doesn't matter much anyway. After all, lump sum is "market timing" too.

Yes, in that specific situation, DCA makes sense. (I believe this is a relatively rare behavior for the market, though.)

That is...

DCA your ENTIRE investment portfolio - old money AND new money - makes sense.

DCA only the new money, while leaving the old money in the market (where it will, net, yield nothing) does not.

Unless, that is, you think the dividend yield will exceed the benefit from DCA - in which case you should throw your entire portfolio, old and new, into the dividend stocks.
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If you have, say, $100,000 in stocks, how much protection are you really buying by investing an additional $1,000 a month for 12 months, as opposed to $12,000 now? If you assume the slower pace makes sense, shouldn't you pull out 11/12 of your existing investment, and put IT in slowly over the following 11 months?

In general, I agree that using DCA for small amounts doesn't make sense. I would define 'small amounts' as amounts that are less than 20% of your existing portfolio. In your example, $12K is less than 20% of the $100K, so really shouldn't make a difference over the long term.

However, if I were to come into a windfall, as from an inheritance, I would consider using DCA if the windfall were greater than 20% of the existing portfolio. The period of time I would use would depend on what percentage the windfall is. If 20-75%, I might use 6 months. For example, put 20% in immediately and DCA the balance over 6 months.

If 76-100% I might use 12 months. If greater than 100% I might use 18-24 months. These are arbitrary time periods, and the percentages are as well, but this type of strategy would help me sleep better at night, since it would guard against sustaining large losses in a short time period (like going 'all in' on 3/1/00, or 5/1/02).

Yes, in a reverse market scenario, where the market goes up after the one-time investment, I would be sacrificing profits. However, I would only be sacrificing profits on the dollars going in, as my original portfolio would still be earning those profits.

2old
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I think at 2old said that DCA makes sense if you are investing a sum which is much larger than your existing investing position.

Lets say you have scrimped and saved, and now have $10,000 after 7 years.

Now you inherit $2,000,000

I think you should use DCA in an ambiguous market. Why? Because you are reducing your risk of investing it all in a high market.
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