Does DCA strategy really work in long term?

[deepblueli]

I don’t understand what you mean.

If it moves sideways, then you can go to buy as you want rather than need to averaging every month or even you should reduce the number of transactions to reduce the fee

 

[Mecisteus]

If it moves sideways, then you can go to buy as you want rather than need to averaging every month or even you should reduce the number of transactions to reduce the fee

If you know market is sideways, you wouldn't buy.

If you know market is going to rise, you buy lumpsum now.

If you know market is going to fall, you sell all.

The purpose of DCA is to eliminate the need for timing in your trasactions.

 

[deepblueli]

If you know market is sideways, you wouldn't buy.

If you know market is going to rise, you buy lumpsum now.

If you know market is going to fall, you sell all.

The purpose of DCA is to eliminate the need for timing in your trasactions.

Haha true....!

But we don't know where the market is going, do we?
So, either we buy a lump sum or DCA, it still depends on timing when we're going to liquidate it to see if you're going to make a profit ultimately.

My argument is having DCA will not reduce the risk of having making losses in the end.

I would argue that we need some active management of it, i.e. take profit during the period of DCA to lock in the profit.

If not, there is a chance that ultimately you're earning much less than other investments.

 

[Mecisteus]

Haha true....!

But we don't know where the market is going, do we?
So, either we buy a lump sum or DCA, it still depends on timing when we're going to liquidate it to see if you're going to make a profit ultimately.

My argument is having DCA will not reduce the risk of having making losses in the end.

I would argue that we need some active management of it, i.e. take profit during the period of DCA to lock in the profit.

If not, there is a chance that ultimately you're earning much less than other investments.

Read post #10 of this thread to address some of your concerns.

BBCWatcher also gave an example of Japan. If you happened to buy at the peak with a lump sum money, there is a good chance that you will remain negative after many many years.

 

[deepblueli]

Read post #10 of this thread to address some of your concerns.

BBCWatcher also gave an example of Japan. If you happened to buy at the peak with a lump sum money, there is a good chance that you will remain negative after many many years.

Ya, if you happen to DCA during a period of uphill (i.e. this year), and market crashes and takes a few years back to your averaging price, you will still remain negative.

Pls don't get me wrong, I totally oppose putting all bullet at once for the reason you mentioned above.

Reverse DCA is a good idea, but most of the cases when people doing DCA for long term, the period of DCA is usually longer than the period you need to use the money, i.e. you may start DCA at age of 30 for the next 30-35 years, and I doubt you will be reverse DCA for 30 more years.

If you are a strong believer of market has a cycle, then you may end up averaging down to zero profit at the end. Yes, it would prevent extreme losses, but it would mean you would end up with not much difference from investing on low risk but low return investment vehicles like bonds.

 

[deepblueli]

One reason I write this thread is that I saw a lot of people suggesting DCA that claims it is superior than other investment methods, e.g. when discussing about BTIR, I saw a lot is proposing IR as using DCA since it is no brainer.

But in fact, it isn't for average joe. If you're DCA on index, you're investing on index, no matter what method you choose, e.g. DCA or others. It doesn't make it suddenly more superior than other, e.g. bond when you adopt DCA method.

 

[TabascoSauce]

I've been investing for over 20 years. I know exactly what DCA is all about.

It's you that don't understand DCA.

Professional investors have NO problem timing the market. It's the amateur investors that have this problem.

Insurance agents take advantage of this fact and promote DCA as a way of investment to their newbie investor clients, which in reality, this type of investing benefit the insurance agent more than their clients.

DCA was never a professional investor way of investing.

if u bother to read up over the 20 years u were in the market, u would have found plenty of evidence that professional investors have trouble beating the market. that is an empirical fact.

 

[BBCWatcher]

If you know market is sideways, you wouldn't buy.

Yes, you would, often, and dollar cost averaging works quite well. Forex markets often move sideways, as a notable example. There's no particular reason why we would/should expect major developed economy currency pairs with Singapore dollars to trend up or trend down in the long run. To a first order approximation, a number of exchange rates are probably bouncing around a basically flat long-term line.

Dollar cost averaging is not exclusive to investing and saving. It's not exclusive to long investment positions either.

Ya, if you happen to DCA during a period of uphill (i.e. this year), and market crashes and takes a few years back to your averaging price, you will still remain negative.

In the case of Japan, a "few years" is nearly 28 years and still counting, with no end in sight. The Nikkei 225's intra-day all-time high was 38,957.44 on December 29, 1989. In all the years since, it has never even approached that level. Earlier today (November 3, 2017) the Nikkei 225 closed at 22,539.12.

And this is not some obscure, minor stock market. Japan is the world's third largest economy. (Up until 2010 it was the second largest.)

Reverse DCA is a good idea, but most of the cases when people doing DCA for long term, the period of DCA is usually longer than the period you need to use the money, i.e. you may start DCA at age of 30 for the next 30-35 years, and I doubt you will be reverse DCA for 30 more years.

There's absolutely no requirement that the build-up term equals the draw-down term. Dollar cost averaging can still apply to arbitrary terms. Hypothetically, a machine could execute dollar cost averaged trades over seconds, with trade frequencies down in the milliseconds.

 

[bei_ge_wang]

DCA is the average strategy for the average dude to earn average returns.

My annualized return for the past 2 years is 8%. That's not too bad and I put in 10 mins of effort monthly.

erm thats because market has been rising the recent past???

 

[bei_ge_wang]

DCA is just a convenient excuse for those lazy/don't want to time the market..

if during the individual's span of investment duration market has been on more downs than ups, DCA isn't gonna gonna "work" for you..



eventually you still have to take a bet whether, for your invested duration, is the trend going to be up or down.. and whether the majority of the time you are invested in, is more up moves or down moves..

what DCA does, is to 'ensure' somewhat that you don't win/lose much.. you simply take the middle point (or rather, the average)..

 

[BBCWatcher]

For most people, most of the time, it doesn't matter how well dollar cost averaging works. Most people don't wake up on a Tuesday with the happy problem of having a $500,000 windfall to invest. No, they're working for a living, earning a regular income (hopefully), and trying to save something out of that regular income every month. So they're going to dollar cost average automatically, substantially. It's just unavoidable. Or they could stockpile idle cash I suppose, but that's not great.

For the remaining, relatively rare situations, sure, the empirical evidence suggests a disciplined, rational, long-term investor can do a little better with a different buying approach, at least in long-term appreciating market contexts. If you're in that situation and you are that person, fantastic!

 

[alexchia01]

if u bother to read up over the 20 years u were in the market, u would have found plenty of evidence that professional investors have trouble beating the market. that is an empirical fact.

What reports you got your info from?

I've been beating the market for the last 10 years, so are many of my friends.

However, if you do DCA, you definitely cannot beat the market.

 

[hindsight]

There's no particular reason why we would/should expect major developed economy currency pairs with Singapore dollars to trend up or trend down in the long run. To a first order approximation, a number of exchange rates are probably bouncing around a basically flat long-term line.

Majors like the US dollar and the British pound have both trended lower vs the Singapore dollar in the last 40 years, sterling in particular, has lost roughly 2/3 of its value vs the Singapore dollar in the last 40 years.

And it is not just the Singapore dollar thats gone up significantly over the long run, the Japanese Yen and the Swiss franc have done even better vs the dollar and the pound in the last 40 years. There is plenty of evidence pointing to long term secular trends in fx markets, so they definitely do not just "bounce around" over the long run.

 

[hindsight]

One reason I write this thread is that I saw a lot of people suggesting DCA that claims it is superior than other investment methods, e.g. when discussing about BTIR, I saw a lot is proposing IR as using DCA since it is no brainer.

But in fact, it isn't for average joe. If you're DCA on index, you're investing on index, no matter what method you choose, e.g. DCA or others. It doesn't make it suddenly more superior than other, e.g. bond when you adopt DCA method.

DCA is for the average Joe because the vast majority of investors cannot beat the market by timing it.

 

[BBCWatcher]

Majors like the US dollar and the British pound have both trended lower vs the Singapore dollar in the last 40 years, sterling in particular, has lost roughly 2/3 of its value vs the Singapore dollar in the last 40 years.

Yes, and 40 years ago was 1977 when Singapore still had lots of kampongs to demolish, Changi Airport was still Changi Air Base, and the MRT didn't exist and was still a decade into the future. Singapore was a developing economy, in other words. That's exactly why I used the word "developed" in this context.

But OK, if you don't like that example (even going forward), how about the highest volume currency exchange pair in the world: U.S. dollar-euro? Is there any particular reason to expect anything much different with that currency pair than a wobble around a flat line, over the long term?

 

[hindsight]

Yes, and 40 years ago was 1977 when Singapore still had lots of kampongs to demolish, Changi Airport was still Changi Air Base, and the MRT didn't exist and was still a decade into the future. Singapore was a developing economy, in other words. That's exactly why I used the word "developed" in this context.

But OK, if you don't like that example (even going forward), how about the highest volume currency exchange pair in the world: U.S. dollar-euro? Is there any particular reason to expect anything much different with that currency pair than a wobble around a flat line, over the long term?

I thought you meant Singapore dollar vs developed market majors.

Anyway this hardly matters because there are long term secular trends between developed market currencies too, Japan was already a developed economy in the 80s, that didn't stop the yen from moving significantly higher vs the pound and the dollar. Same thing for the Swiss franc, developed economy, long term appreciation vs currencies with chronic trade/current account deficits.

 

[deepblueli]

what DCA does, is to 'ensure' somewhat that you don't win/lose much.. you simply take the middle point (or rather, the average)..

Ya, agree that it should help such that you don't lose much, and you will still have a chance of making a loss.

DCA is for the average Joe because the vast majority of investors cannot beat the market by timing it.

My point is it does not matter if you DCA or you try to time the market, you're exposed to risk of underlying asset. If you don't understand what's the thing you're buying, and don't understand the risk, then DCA doesn't help. Asking an average joe who doesn't know about investment and stock market to invest in stock market using DCA, it is not going to help him much compared to telling him to buy SSB.

For most people, most of the time, it doesn't matter how well dollar cost averaging works. Most people don't wake up on a Tuesday with the happy problem of having a $500,000 windfall to invest. No, they're working for a living, earning a regular income (hopefully), and trying to save something out of that regular income every month. So they're going to dollar cost average automatically, substantially. It's just unavoidable. Or they could stockpile idle cash I suppose, but that's not great.

For the remaining, relatively rare situations, sure, the empirical evidence suggests a disciplined, rational, long-term investor can do a little better with a different buying approach, at least in long-term appreciating market contexts. If you're in that situation and you are that person, fantastic!

Agree, you should't stockpile the idle cash. But you must choose wisely and know what you are buying with your idle cash.

Let's use an example, using DCA to buy SSB over next 30 years that have ~2% annual return, it will probably end up with ~30% (not 60% because you not buying it lump sum now) profit by the end of 30 years.

But using DCA approach on others like stock market, after 30 years, what's the chance you'll make 30% above your average price when you want to sell it, even with reverse DCA?

The difference is SSB has guaranteed return, i.e. positive upward trend, while the stock market doesn't have that.

So, the key is what's the underlying asset you're buying. If you're buying stock, you're exposed to the risk of a stock market. It doesn't matter if you're adopting DCA or not. Asking an average Joe to buy stock using DCA who doesn't know stock market, it probably won't guarantee him to make more profit than putting it in SSB or FD or other safer investment options, except of course I would agree it would prevent him from making big losses in stock market.

 

[SGRevolution]

DCA for local market sucks...stupid STI moving sideways forever

better for international stocks

 

[Shiny Things]

One reason I write this thread is that I saw a lot of people suggesting DCA that claims it is superior than other investment methods, e.g. when discussing about BTIR, I saw a lot is proposing IR as using DCA since it is no brainer.

But in fact, it isn't for average joe. If you're DCA on index, you're investing on index, no matter what method you choose, e.g. DCA or others. It doesn't make it suddenly more superior than other, e.g. bond when you adopt DCA method.

You’re arguing against a point that nobody’s actually making. Nobody’s saying that dollar-cost-averaging magically makes equities less volatile. You’re still long a bunch of stocks, with all the concomitant swings and roundabouts.

Agree, you should't stockpile the idle cash. But you must choose wisely and know what you are buying with your idle cash.

Let's use an example, using DCA to buy SSB over next 30 years that have ~2% annual return, it will probably end up with ~30% (not 60% because you not buying it lump sum now) profit by the end of 30 years.

But using DCA approach on others like stock market, after 30 years, what's the chance you'll make 30% above your average price when you want to sell it, even with reverse DCA?

I think the thing you’re getting hung up on is that you’re conflating “dollar cost averaging” with “time in the market beats timing the market”. The point of dollar-cost-averaging is that it’s a method of deploying cash that’s a) easy to implement and b) ties out nicely with how most people actually receive their cash, in the form of a biweekly or monthly paycheck.

The average investor doesn’t want a wildly complex strategy for their investments. They don’t want to have to monitor the markets every day and track moving averages or Bollinger bands; they want an investment strategy that they can follow easily and that lets them get on with their lives. For those people, dollar-cost-averaging works really well. Certainly you can do better if you’re prepared to pore over the markets and take on single-stock risk—Alexchia is proof of that—but most people don’t have the time to do that, and for those people, a “good enough” solution really is good enough.

 

[BBCWatcher]

Agree, you should't stockpile the idle cash. But you must choose wisely and know what you are buying with your idle cash.

You shouldn’t stockpile cash, but you should be careful with your stockpiled cash? That doesn’t make sense.

You’re a typical middle class Singaporean, you’re working hard and earning a paycheck, and you thankfully have some money left over each month to save (after paying off high cost debt, building up an emergengy reserve fund, and insuring adequately). Let’s say that’s $500/month. What are you supposed to do here besides dollar cost average? That’s what’s going to happen, automatically. The only other choice I can think of is to stockpile cash, then try to time the market with stockpiled cash. Are you recommending that or not?

Yes, sure, put that $500/month into something that makes sense. The “ideal,” in my view, is a low cost, passively managed, globally diversified, “target” index fund. (“Target” funds automatically, gradually shift the portfolio mix from higher volatility potentially higher yielding securities to lower volatility, more reliable but lower yielding securities — from stocks to bonds, typically.) But unfortunately that ideal fund doesn’t exist (or exist easily) from the Singapore market for Singaporeans.

Theory is terrific, but then you have to put that theory to work in the real world. And about 98% of the time dollar cost averaging is the only practical choice anybody has.