Wednesday, 17 September 2014
Dollar Cost Averaging is Voodoo or what?
I must first qualify myself that of the 3 - Averaging down, Scaling in, and Dollar cost averaging - I've never done Dollar cost averaging myself.
So unlike my other posts on this topic, I'm totally speaking from an "academic" perspective.
Dollar cost averaging is usually spoken in the same breath with passive index funds or ETFs. Although I think its just as valid as an accumulation strategy for building a core position in a single stock.
Most people who practice Dollar cost averaging have in fact outsourced this activity to their broker or the financial institution where they have signed up for the plan.
Sometimes it's better to not peek into the kitchen of your favourite eating places.
Let's take a moment and make believe you prefer to do this Dollar cost averaging for let's say the STI ETF DIY style.
Your plan is to allocate $1,000 as your Dollar cost average to be invested per month.
Immediately you are faced with 2 head scratchers:
1) Which day of the month should you buy? One the first Monday, third Wednesday or last Friday of the month?
2) After deciding on a fixed day of the month, what time of the day should you buy? At 10:00 am? 1:00 pm? 4:00 pm?
Have anyone discovered the voodoo part?
Yes!
Price is not on the menu!
You just close your eyes, pinch your nose with your thumb and index finger with one hand, and press the buy button with your other hand!
Is that voodoo or what!?
Be honest. When was the last time you bought a stock without looking at the market price?
So what's the main benefit of Dollar cost averaging? There must be one, right?
Well, you get to say: "Look mom! No brains!"
Just kidding!
The main benefit is that come high water or brimstone, you just calmly stick with your Dollar cost averaging plan.
You don't care whether there's a war, coup, revolution, fire or flood. Neither are you bothered with nuclear radiation, Sars or Ebola. Whether the market is up 20% or down 50%. You just continue to close your eyes, pinch your nose, and jump into the market at your pre-determined calendar day and time of day.
That would also mean you don't have to monitor the markets, don't have to sharpen the saw on your investing/trading skills, don't need to watch the news, and definitely no need to read financial blogs!
You free up your precious time to focus on your career, business, and more importantly - your family.
Without this benefit, I can't think of any other reasons why anyone would want to engage in Dollar cost averaging...
Want to bet whether Dollar cost averaging is something you bought into yourself through your own volition? Or is it, like most insurance, something you were sold to?
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Hi SMOL,
ReplyDeleteUnlike you, I do dollar cost average, and I have done it for almost 4 years already!
Results are satisfactory and I admit it does irk me when the plan somehow buys the ETF when it's priced the most expensive in that month.
Hi 15HWW,
DeleteGlad you responded! Knowing you, I can skip the sugar-coating part ;)
We have NO CONTROL over the outcome or result of any of the 3 entry strategies we employ - be it Averaging down, Scaling In, or Dollar cost averaging.
The market will give what it wants to give.
That's why I rather be lucky than smart!
The last 4 years were... Would you consider yourself luckier than if you had started your Dollar cost averaging journey from 2004 as your first 4 years?
I am merely pointing out the paradox we as retail investors sometimes put ourselves into:
1) If you had really bought into the Gospel of Dollar cost averaging, you would not be "irked" with your plan. Bet you didn't ask HOW your plan would be executed when you sign on the dotted line, did you?
2) If you had wished your plan would do a better job of "market-timing" to secure the best price of the month, isn't that ACTIVE fund management?
"Sir, if you want Business Class, you have to pay for it." - that's what I was told when I tried to upgrade my economy class ticket during my corporate days...
Don't laugh. My success rate is 1 out of 5 attempts I get upgraded! Frequent business traveller mah. Sometimes must thick-skin!
Hi SMOL,
DeleteTrue, the smartest or most astute person can lose money if he's unlucky.
But more often than not, you make your own luck? If I had started DCA in 2004, I would have been fried in 09. But if I persisted till today, maybe I would be even better off than now? =)
I think I do buy into the "gospel of DCA" partially since even now, I am contributing!
I guess I was greedy when I say that I am "irked" at some of their timing. There have been times when the plan managed to call the bottom in the month and I haven't given them credit for that.
Maybe what doesn't help is that I have this other pot which I monitor much more actively. And when I compare their results, the DCA one pales in comparison. (Not that I am complaining.)
What I am most bothered about with my DCA is that the expense ratio is about 1%, which is far higher than what I pay my internet broker when I buy stocks.
DCA makes more sense when I was a much smaller player a few years back. =)
15 HWW,
DeleteIt' beautiful irony and contrast between you and temperament.
Youth with more experience is gaining confidence in himself. He is questioning, verifying, reflecting...
Experienced on the other hand is slowly letting go... There's nothing to prove anymore... He recognises himself and is at peace with who he is.
:)
So you you can see dollar cost averaging is not good enough. How about value dollar cost averaging. You determine the value when you want to do dollar cost averaging an index fund.
ReplyDeleteHeck, why not mimic the STI ETF. Very soon you can do it when 1 lot is reduce to 100 shares in 2015 Jan or when? i may try it
temperament,
DeleteIts not about whether its "good enough" like I've replied 15 HWW.
Value averaging is just another variation of Dollar cost averaging.
The question to ask is after you have embarked on this journey, why are you are still monitoring the markets, reading investing books, attending seminars, participating at forums/blogs, etc?
Shouldn't the main SELLING POINT is that it's on auto-pilot and that you free up time to enjoy living instead?
That's the PARADOX - do we believe in PASSIVE (no need to work for money and others will look after us); or do we have to EARN money by being ACTIVE as no one is more interested in our own well being than us?
Ha! Ha!
Deletei know we should not make a mess of our life, but comes to investing , i believe you can make the best of every things you come across. Rojak is a very tasty local salad dish to me. That's why i think i am a "ROJAK" investor if you can remember.
On the other hand if you really very afraid or not so interested in investing yet still want to invest in the market, passive index (S & P 500 or STI ETF) investing for 20 to 30 years may be feasible. But when you need to take out the money at your retirement time may be very important. If it has been a secular bull markets for years just before you need the money then you are lucky or blessed.
Now it seems you can't escape Lady Luck or God's blessings. And is in term of timing too.
Who says you can escape anything?
i say you can't.
temperament,
DeleteYou have your rojak and I have shades of grey ;)
They say we are our own worst enemy.
Perhaps we can hedge against ourselves?
50% of our portfolio we engage in "We are Masters of the Universe" ACTIVE investing; the other 50% we hedge against our hubris by "Look mom no brains" PASSIVE investing?
Or maybe I should just go to Kwan Im Ma temple and ask: Is this stock a buy? Can enter at this price?
And pray hard that the year I call it quits from the markets, it's not 1997, 2002, 2008 all over again :(
Now that's market timing at its finest!
I remembered some funds selling dollar cost average as a strategy and how it has work wonders in terms of money.
ReplyDeleteThat was I think almost 6-7 years ago, when my sister just started out in the insurance line, she was practicing a sale pitch, not it is not a ILP, she doesn't believed in it too, it is part of the whole thing about where the fund of endowment go...
She was showing a line graph and telling me how average cost can "ride the volality" (I don't disagree) and emerge a "winner". I point to her then the end point of the graph is at the highest point, U don't need this strategy to be a winner. In fact I point to her if someone hoot big big at the low point and do buy and hold, it is a bigger winner...
I am not saying which strategy is better, I am just pointing up how my sis was taught to sell, and she innocent belived so...
sillyinvestor,
DeleteIf I share with you a strategy where I invest in accordance to the different phases of the Moon and the position Earth is as it revolves around the Sun, what would you call me?
But isn't that Dollar cost averaging?
Thank you for sharing your sis experience.
My belief is that no one wakes up one day with the inspiration to do Dollar cost averaging. This idea has to be planted in our brains by someone else....
Averaging down I did it instinctively "to get even" - I very emotional.
Scaling In I did it after reflecting how can I do it better - I thinking soldier.
Hi SMOL,
ReplyDeleteA solid article as usual.
Looking forward to more incisive articles from you.
Thanks.
L Young.
DeleteThanks! But don't take what I write too seriously OK?
Just marking time as the STI does the cha-cha.
One day up, 2 days down; cha-cha-cha!
One day down, 2 days up; cha-cha-cha!
Hi SMOL,
ReplyDeleteI also from academic point of view, no real experience. I think doing dollar cost averaging is better if you do it automatically as a system, like those from POSB one. Just input how much you want to put in every month and the system will automatically buy it and update for you. Just look once a year and live your life.
Those who are doing dollar cost averaging yourself...phew...you need a whole lot of discipline man. It's just mind f@ck when you start to think whether today is a good time to buy in when you're supposed to do it automatically!
Scrip dividend is also another form of averaging, if you think about it. Auto somemore, lagi better. That one I got experience. I've scrip dividends from HSBC since 2007. I don't even bother and let it roll.
LP,
DeleteI can safely say the majority of investors that "practice" Dollar cost averaging doesn't even know it themselves! All they see is ILPs, Passive index funds/ETFs, etc.
From a snake-oil salesman perspective, a one time deal is not as profitable as a customer for "life". Hence banks, brokers, and insurance companies love pushing - "Just give us your money on a monthly basis and we'll do the rest. Don't worry!"
For those who love "passive income", how's that from land owners' perspective? Which shepherd doesn't like a tethered sheep?
I showed the DIY example to shake out the fallacy most have on their monthly "tributes" - the investment process is less about astuteness; more akin to "hantam bola"!
We only know if we attempt to try it ourselves!
My bad, We should never peek into the kitchens of our favourite restaurants :(
But I do agree with you "auto" is great for busy people. That's why I guess some families hire maids. Why do housework ourselves when we can pay someone to do it for us? We can use the free time to focus on other parts of our lives that are more important ;)
The reverse is true. If an entrepreneur or career person has too much time for the markets, we can also guess how his business or career is going...
Agreed. Need to be Auto mode. Grown up or growing up human's mind is difficult to be auto.
ReplyDeleteBaby's mind may be auto but not when you are not baby anymore. Think too much!
:-)
CW,
DeleteYou are so right!
Planning, setting goals, tracking, measuring, benchmarking, mind-flips...
Grown ups do think too much!
It can just as well that the person who diligently invests monthly into a passive STI index ETF today may outperform in 30 years later most active DIY investors/traders!!!
This person will start a blog 30 years later explaining how he has beaten the majority of professional money managers, most financial bloggers, Temasek, and GIC!
His secret?
Just close eyes and pinch your nose as you dive into the markets!
Look mom! No brains!
And don't think too much!