DCA strategy during bear market

[zzTiny]

The problem is don't know what's the bottom leh

Everyone now knows we are in a "bear market" . Only 25% of US stocks are above sma200. Stocks don't go down linearly, it gets poison slowly with lots of volatility.

But then looking at s&p, inflation and interest up doesn't mean nominal return goes down all the way wor. But inflation eats up the returns and real return become 0 or negative.

 

[iceblendedchoc]

Suggestion is to dca lump sum by 6 months or 9 months. No one know exactly what is the bottom. Doubt this will be worse than covid drop in mar 2020.

and what you seem to want is buy the bigger dips which is not dca

 

[Cupid Stunt]

You are making the point I’m making. We aren’t Buffett.

Well you aren't. Doesn't mean others can't be above average. At least don't flame them and discourage them from trying.

Warren Buffett: “Instead of stock picking, Buffett suggested investing in a low-cost index fund. ‘I recommend the S&P 500 index fund,‘ Buffett said, which holds 500 of the largest companies in the U.S., ‘and have for a long, long time to people.’”

In the Singaporean context this’d more likely be a MSCI or FTSE global stock index fund since most residents of Singapore aren’t going to be retiring in a U.S. dollarized (or fixed U.S. dollar exchange rate) country.

That is precisely Buffett's strategy, to wait for stock to tank and buy undervalued stock, and then ask you to DCA the price up so he gets rich.

‘Don’t listen to what people say, watch what they do"

Next you will be trying to go car lite because that is good for the country encouraged by the PAP, while the ministers all have multiple cars.

 

[boroangel]

I just stick to this personal mantra and hope it works out:

When Fed does QE, keep going long.
When Fed does QT, keep going short.

I do feel it’s too early to DCA now. Currently keeping all my energy and financials and not adding more to equities. But been taking short positions since Dec ( SARK, SARK.L and SQQQ) and waiting for relief rallies to go short again.

 

[BBCWatcher]

Even if you wanted to attempt Martingale dollar cost averaging, who’s going to fund it? Any investment strategy has to be operable, a strategy that you can actually execute. That one clearly isn’t. I’ll just quote Investopedia: “The problem with this strategy is that you need a significant supply of money to achieve 100% profitability. In some cases, your pockets must be infinitely deep.” Big problem! That’s not anybody working for a living and trying to save.

 

[BBCWatcher]

Why don’t you just buy Berkshire Hathaway stock if you want to bet on Buffett? Yes, OK, it’s U.S. estate taxable, but life insurance can take care of that.

 

[reddevil0728]

Well you aren't. Doesn't mean others can't be above average. At least don't flame them and discourage them from trying.

That is precisely Buffett's strategy, to wait for stock to tank and buy undervalued stock, and then ask you to DCA the price up so he gets rich.

‘Don’t listen to what people say, watch what they do"

Next you will be trying to go car lite because that is good for the country encouraged by the PAP, while the ministers all have multiple cars.

You are making my point again, you are comparing yourself to Buffett lor.

I think you are the one being hostile and flaming actually.

I am just suggesting you want to do anything do it with a basis and not on random chance.

 

[jayou8]

I think most peeps here agree that you wouldn't know how the market is going to pan out in this random walk. Hence one should not be have any biases, including the way to average.

I have nothing against DCA and I think it works very well especially on a bull market. However the whole point about averaging is to lower your average as low as possible.

TS has asked for views if there are any other approaches when averaging in a bear market. If we stick to his theme, then I would argue DCA might not be the best approach.

Don't forget if we use TS example of 30% drop, it would require 42.86% recovery just to breakeven.

% Loss of initial capital	% Profit required to recover
5​	5.26​
10​	11.11​
15​	17.65​
20​	25.00​
25​	33.33​
30​	42.86​
35​	53.85​
40​	66.67​
45​	81.82​
50​	100.00​
55​	122.22​

Other approaches has its disadvantages as well as rightfully pointed out in the Martingale example by BBC.

However it would be good to have a healthy discussion the see if there is a hybrid approach such that we can learn from.

 

[celtosaxon]

I am not a DCA zealot, I am a statistical zealot. And statistically speaking, putting every investment dollar to work as early as possible has the best statistical odds of the best returns in the long-run. This is just fact, it can be proven statistically over any long-term historical period. Are there exceptions? Sure. Can those exceptions be consistently identified and taken advantage of? The statistical odds of doing that over the long-run are extremely poor. How many actively managed funds have consistently done this year after year for decades? If it were easy, everyone would be doing it!

In my early years I’ve tried my luck at stock picking and market timing and will be the first to admit that I’m no Buffett. I am happy beating the vast majority of the investing public by DCA investing into the broad index.

 

[tangent314]

Timing your buys for the bottom is only half of the strategy required to beat DCA. You will need to sell at the top as well.

If you can predict when the top and when the bottom is, then you can make a lot more money than DCA. But again if you get it wrong and sell at what seem to be the top but continues to go up... you will lose to DCA. And this has happened a lot. At this point you are gambling and not investing.

 

[reddevil0728]

Timing your buys for the bottom is only half of the strategy required to beat DCA. You will need to sell at the top as well.

If you can predict when the top and when the bottom is, then you can make a lot more money than DCA. But again if you get it wrong and sell at what seem to be the top but continues to go up... you will lose to DCA. And this has happened a lot. At this point you are gambling and not investing.

one can also "DCA" as it goes up to take profit.

 

[limster]

these threads can go on and on with everyone claiming that they have the 'right answer'.

my own view is that there are different methods you can adopt if you have a lump sum to invest. its good that some have shared in this thread their own actual experience with DCA and how they actually invest/DCA. Those with actual experience in deploying a large lump sum will know that there is also "psychology" involved. This is something that keyboard warriors won't be aware of, because real-life is different from paper trading

On the other hand, there are always those who don't actually share what they are doing - maybe because they don't 'practice what they preach?'

My own view is that US$75 is actually a pretty decent entry point for IWDA, so you are lucky you are thinking of queuing for IWDA now. Imagine if you were asking the same question earlier when IWDA was above $80/$85... I will be queuing for IWDA at $74.99 this week!

 

[churnmaster]

Seek advice / opinion. Have meangingful lump sum. My conviction: S&P 500 will enter bear market in 2022. My strategy: start DCA into IWDA once S&P 500 falls 20% from high.

Q1: How long (months) to spread lump sum for DCA? Note the DCA starts only after S&P 500 falls 20%.

Q2: Simple DCA or enhanced DCA? If enhanced, what rule do you recommend?

Unlike many others, looks like you have managed to avoid the double digit fall in S&P500 YTD. Congratulations on that.

If I were to do a DCA, I would start once the market is 15-17% below its peak instead of waiting for 20%. This is because even the bearish investors / traders start closing their shorts as the market approaches that 20% mark. This is what causes the market to rebound after coming so close to that 20% mark. So, its important to be bit flexible about that 20% level.

Having said the above, when FED is talking about sucking out liquidity (around 550-600B by the end of the year), risk assets should likely deflate to some extent during this period. So my period for DCA would be from May to Oct. Technically, the market always tries to retest its the previous cycle peak, which in this case in 3400. Thus, from 4100 to 3400, would be my range for the DCA.

Now, the controversial part., since I'm more into options, I would just sell cash secured puts at different strike prices (from 4000 to 3400) and different expiry dates. Based on the current elevated IVs, this should yield around 6-7% annualized return on the notional contract value. What if it doesn't drop below 4000 ? I'll be happy to earn the premiums. I'm not a FOMO person.

 

[iceblendedchoc]

I am contended with average index returns for 90% of my portfolio. I doubt i am smarter than Buffett or Charlie Munger, but maybe some of the people are.

 

[RedsYWNA]

S&P500 high was 4818 in Jan. 20% fall will be 3854, which is not far from Friday's 4123 close. In fact, 20% decline occurs once every few years, the definition of bear market.

You don't need weed to know this. Just need some basic investing knowledge.

https://www.investopedia.com/terms/b/bearmarket.asp

How abt an alternate method, selling cash secured puts?

Depending on your cash reserves, sell monthly puts against the 20% S&P drop. If it drops that low, you get your shares at the assigned price.

If it doesnt, you still get some money from expired put options. Of cos, S&P ETFs are rather high for this strategy to work, so you need a warchest.

EDIT: I think SPLG is probably the cheapest S&P 500 ETF to employ this strategy. VT also not too bad......Gd luck!

 

[zzTiny]

Do wheeling ah you guys?

I also want to try leh but I no moolah.

 

[jayou8]

Now, the controversial part., since I'm more into options, I would just sell cash secured puts at different strike prices (from 4000 to 3400) and different expiry dates. Based on the current elevated IVs, this should yield around 6-7% annualized return on the notional contract value. What if it doesn't drop below 4000 ? I'll be happy to earn the premiums. I'm not a FOMO person.

Depending on your cash reserves, sell monthly puts against the 20% S&P drop. If it drops that low, you get your shares at the assigned price.

If it doesnt, you still get some money from expired put options. Of cos, S&P ETFs are rather high for this strategy to work, so you need a warchest.

Interesting idea! I also want to try. If you guys are using IB don't mind sharing/ recommending a few ETF tickers which has a thick and liquid ladder for me to look see please? Need to check how much capital is needed for this.

 

[churnmaster]

on Interesting idea! I also want to try. If you guys are using IB don't mind sharing/ recommending a few ETF tickers which has a thick and liquid ladder for me to look see please? Need to check how much capital is needed for this.

The most liquid ETFs for options are SPY, QQQ and IWM. Capital is typically around 20% of notional contract value on IB. It may change with increase in volatility.

 

[d5dude]

US financial system is highly leveraged and most of the debt is owned by foreign govts, not domestically like in Japan.

By the way, you missed the point of my argument. How do you set up a DCA system if it is the final crash, and if it's not the final crash, then what's the point of DCA if it takes 10 years to recover like 1973-1982?

Futhermore, SP500 was not an inflation hedge during 1970s stagflation.
https://www.longtermtrends.net/stocks-commodities-ratio/

My answer would be simple: never DCA into a bear market. Only DCA in a bull market.

Takes no more than 5sec to google search before you spread such misinformation.

https://hubbardobrieneconomics.com/2022/02/07/the-national-debt-just-hit-30-trillion-who-owns-it/
As of 2022, only ~27% of the debt is held by foreign countries, thats not "most of the debt".

And yes the debt/gdp ratio is absolutely humongous now, that is also why the fed funds rate isnt going to 13% like it did in 1973 (which totally decimated the stock market). Btw the US is not the only advanced economy with such high debt loads, many western/southern European countries are in the same boat, so is Japan and China (if we include local gov debt which are often hidden from sight). Unlike 1973, there is simply very little central banks can do to fight inflation.

Anyway I dun think inflation will grow at the same rate it did back in the 70s, because debt servicing is long term deflationary, this alone will counter many of the secular inflationary forces we see today.

 

[d5dude]

Also, TS said he wants to start DCA when S&P falls at least 20%, he wants opinions on how long this should take and whether he should go for regular DCA or enhanced DCA, he didnt ask people for opinions on whether he should market time, stock pick or trade options.