Photo by Ray Fragapane on Unsplash
Questions:
- Am I getting the most out of my investments?
- Are my investments making more or less than the automatic 401k’s in the S&P 500?
- Should I self-manage or robo invest?
Story: What is Dollar Cost Averaging – DCA ?1
- It’s an investment strategy where you make equal monthly investments/payments into an index fund (or a few index funds).
- The concept is that the money buys more stock when the price of a stock or fund goes down and less stock when the price goes up. As an example let’s say you invest $500 a month, every month in Vanguard FTSE Social Index Fund Admiral Shares
- This strategy is great for smoothing out volatility in the market.
Referenced Info:
- The idea for this blog came from Putting Dollar Cost Average on Steroids (It’s behind a paywall)
- Better DCA
Putting Dollar Cost Average on Steroids (aka DCA Plus)
- The stock market generally goes up 68% of the time, and goes down 32% of the time on a quarterly basis.2
- The DCA Plus strategy is to invest 2-3x ($1000-$1500) your normal investment amount during down months.
- On up months you could skip the investment until you catch up, invest the original amount, or invest less. (i.e. $250)
- This strategy benefits the most from volatility in the market.
- It’s difficult to predict how much better DCA Plus will perform as it depends on the time frame chosen.
- Sam from financial samurai blog describes a modified DCA where in addition to the monthly investments he will re-invest when the stock market is down more than 1% in a day or down 1% from his last monthly investment.
- He will also lower his monthly contributions to be 50% less when the stock market is up from month to month.
Analysis
- Using data from a long running S&P index fund, SPY, I was able to ascertain that Better DCA outperforms DCA Plus by about 3-4% and DCA by about 6-7% over the past 20 years.
- From 2018-2020 the year over year return on your money was 1-2% in the SPY index fund. This strongly suggests that money invested in SPY (or SPY like investments) should be re-allocated to higher yielding investments and/or cash. I’ll be writing another post on asset allocation.
- Chen, James. Dollar-Cost Averaging. Investopedia (accessed 2021)
- Carlson, Ben. 2015. Playing the Probabilities. A Wealth Of Common Sense (accessed 2021)
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