Dollar Cost Averaging is a Myth?

The key is that a DCA approach has zero emotion attached to it. On a given date, money goes to the account and it happens. Even using Technical Analysis has an emotional side to it. Since Tech Analysis must be interpreted, you could be making a premature or late decision based on speculation. Besides once you see a MACD Cross or whatever it is a trader looks for, it's already happened. In my case when prices drop significantly because of something stupid like a Chinese Crash, I have to take the opportunity and add more money to the DCA amount.
 
Confining ourselves just to the TSP system, I think the actual facts are more subtle.

The only way into the TSP is regular small deductions every paycheck, which looks like DCA. It is DCA if you pre-allocate that deduction to some mix of F, C, S, or I, and never or rarely re-allocate once you buy. But if your contributions are 100%G, you are essentially accumulating cash in anticipation of a lump sum trade into one of the funds whose price can actually go down. I guess you could do an even more extreme lump sum strategy by setting your contributions to 100% of your pay to G for 3 months, then 0% for 9, but I doubt if many do that.

So, 100%G is a lump sum strategy, and 0%G is DCA.

Personally, I now do the former, but did the latter for 20 years. For most of those years, you couldn't trade daily, and your choices were stocks, bonds or cash, so the ONLY way to allocate was to DCA upfront and fix things during "open season." I DCA'ed into the C fund.

Now we can day trade. Buying 100% G sets up lump sum investing, and things get interesting.

Once in, though, who DCAs inside TSP? Nobody. Of the people who are tracked on this site, everyone swings in big trades: Tom just went 100%G in one trade. Others might go from 50%I to 10% I or whatever, but they do it all in one large trade.

DCA'ing inside TSP would mean going from 50% to 10%I in a series of, say, 20 2% trades. In that sense, almost nobody DCA's. Single large trades.

Therefore, for TSPer's DCA means differential allocations at the contribution stage. If we wanted to compare strategies using real data, we'd need a tracker that, say, only moved between C and I, and a tracker that DCA'ed into the C and I initially but didn't trade thereafter. For a fair comparison, their long-term averages would have be the same, e.g. 50C:50I.

So the comparison would be: 100%G contributions followed by sporadic, random (or non-random, "timed") buys of 50C:50I, versus initial "DCA" 50C:50I buys. The financial gurus say none of it matters. In the long run, random and DCA don't differ. The only one with a chance to beat the averages is the non-random timed buy, but beating the averages is very, very difficult.

Jonathan
 
That is an excellent post. I did some DCAing from the C fund into the I fund in 2% increments (around 10K) from the $21.65 price, again at $22.04, then at $23.21, then at $23.55, and finally at $24.10 for a total 10% position. I went back to the C fund from an I fund price of $24.41. I may try and do that again on the next spill. Most of the time I prefer to DCA my allocation into one fund and let fate be my guide. It really works well in a bear market like 2000-2003. The lower the price the more shares that are accumulated - my portfolio redeemer. You just have to be willing to dump good money down a dark hole. But it always pays off in the end. Now I will have to pay over $17.00 for my next DCA into the C fund - ah you can't win them all.
 
Parable of the TSP Talents

14"For it is just like a man about to go on a long extended TDY journey, who called his own workers and entrusted his possessions to them.


15"To one he gave five talents, to another, two, and to another, one, each according to his own ability; and he went on his TDY.


16"Immediately the one who had received the five talents went and traded with them, keeping them in the “I” fund, and exchanging with the “S” fund, and, from time to time, retreating in the “G” fund. He watched TSP Talk, listened to Cramer, did his “due diligence”, found ebbs and flows, and over time, this one gained five more talents.


17"In the same manner the one who had received the two talents gained two more, although only alternating a portion of his portfolio occasionally between the “C” fund, and mixing it with bonds in “F” for diversification, while filling the balance with an age appropriate “L” fund- the L2020, and sitting on that portion quietly. And compounding over time led to the two additional talents, not bad for moderate risk.


18"But he who received the one talent went away, and dug a hole in the ground and hid his master's money. Kept it in the “G” fund always. Never took a risk, afraid that the markets may repeat the 1929, or 1987 downsides, and living a life of fear. He bothered not to learn about investing. He simply made a single one-time deposit, and left it there.


19"Now after a long time the master of those workers came and settled accounts with them.


20"The one who had received the five talents came up and brought five more talents, saying, 'Master, you entrusted five talents to me. See, I followed the markets closely, learned much, exercised careful swing trading based on the Ebb trader, and TSPTalk, and other appropriate learning tools, , and I have gained five more talents.'


21"His master said to him, 'Well done, good and faithful servant You were faithful with a few things, I will put you in charge of many things; enter into the joy of your master.'


22"Also the one who had received the two talents came up and said, 'Master, you entrusted two talents to me. See, I have exercised age appropriate risk models, using the “L funds” for part of the time, and diversified with mixed stocks and bonds, and gained two more talents.'


23"His master said to him, 'Well done, good and faithful slave. You were faithful with a few things, I will put you in charge of many things; enter into the joy of your master.'


24"And the one also who had received the one talent came up and said, 'Master, I knew you to be a hard man, reaping where you did not sow and gathering where you scattered no seed.


25'And I was afraid, and went away and hid your talent in the ground. The G in G fund stands for ground. See, you have what is yours.'


26"But his master answered and said to him, 'You wicked, lazy slave, you knew that I reap where I did not sow and gather where I scattered no seed.


27'Then you ought to have put my money in the L INCOME, and on my arrival I would have received my money back with interest.


28'Therefore take away the talent from him, and give it to the one who has the ten talents.'


29"For to everyone who has, more shall be given, and he will have an abundance; but from the one who does not have, even what he does have shall be taken away.


30"Throw out the worthless slave into the outer darkness; in that place there will be weeping and gnashing of teeth.
 
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Confining ourselves just to the TSP system, I think the actual facts are more subtle.

The only way into the TSP is regular small deductions every paycheck, which looks like DCA. It is DCA if you pre-allocate that deduction to some mix of F, C, S, or I, and never or rarely re-allocate once you buy. But if your contributions are 100%G, you are essentially accumulating cash in anticipation of a lump sum trade into one of the funds whose price can actually go down. I guess you could do an even more extreme lump sum strategy by setting your contributions to 100% of your pay to G for 3 months, then 0% for 9, but I doubt if many do that.

So, 100%G is a lump sum strategy, and 0%G is DCA.

Personally, I now do the former, but did the latter for 20 years. For most of those years, you couldn't trade daily, and your choices were stocks, bonds or cash, so the ONLY way to allocate was to DCA upfront and fix things during "open season." I DCA'ed into the C fund.

Now we can day trade. Buying 100% G sets up lump sum investing, and things get interesting.

Once in, though, who DCAs inside TSP? Nobody. Of the people who are tracked on this site, everyone swings in big trades: Tom just went 100%G in one trade. Others might go from 50%I to 10% I or whatever, but they do it all in one large trade.

DCA'ing inside TSP would mean going from 50% to 10%I in a series of, say, 20 2% trades. In that sense, almost nobody DCA's. Single large trades.

Therefore, for TSPer's DCA means differential allocations at the contribution stage. If we wanted to compare strategies using real data, we'd need a tracker that, say, only moved between C and I, and a tracker that DCA'ed into the C and I initially but didn't trade thereafter. For a fair comparison, their long-term averages would have be the same, e.g. 50C:50I.

So the comparison would be: 100%G contributions followed by sporadic, random (or non-random, "timed") buys of 50C:50I, versus initial "DCA" 50C:50I buys. The financial gurus say none of it matters. In the long run, random and DCA don't differ. The only one with a chance to beat the averages is the non-random timed buy, but beating the averages is very, very difficult.

Jonathan

Just found this. It answered much of the question posed below. Great website. - Malyla

This has been on my mind for a while. I know this thread is old, but I think someone may know what the answer to this contribution question.

If I allocate my biweekly contribution to equal parts in C,S,I (say split $337.5 into buying shares in each fund), what happens when I rebalance my account with an IFT from G to stocks? Are the small amount in the stock funds (from the bi-weekly allocation) sold at the COB share cost and then shares are bought as defined in the IFT (say 100%C)? If that is the case, then doesn't that make DCAing mute as you do not really get to keep those C stocks that you bought with your contribution (possibly at a low stock price) at that price you paid because it is all reshuffled to the new stock price at the time of the IFT?

bought $112.5 C at $10/share = 10 shares or 0.15% of your account
bought $112.5 S at $15/share = 7.5 shares or 0.15% of your account
bought $112.5 I at $16/share = 7.03125 shares or 0.15% of your account
have $74,662.5 in G at $6/share (12,443.75 shares)

Perform an IFT 100% C at $11/share

Does IFT cause all the shares to be sold to buy the C fund at the $11/share price? Even if you could specify less than 1% increments in the IFT, everything would still be sold at the COB share price and bought in the distribution specified in the IFT.

Does this mean that DCAing with our TSP fund is impossible? The DCA method is about gathering more shares in a fund. The only way I can see how to do this is to go to G when C is high (say $13/share), then buy back into C when it is low (say $10/share) etc.... Is the DCA method just a sell high, buy low method and am I correct on what happens when we do an IFT? If so, then it’s an all or nothing DCA method as we can not keep shares at previous cost once we make an IFT.

Thanks.
 
Maylyla, if you look at your TSP quarterly reports of account activity, it shows all the account activity that has occurred that quarter, IFTs as well as biweekly contributions. I think you can figure out from those records what is really true re selling existing shares vs. buying new shares to ADD to the existing shares.
 
Maylyla, if you look at your TSP quarterly reports of account activity, it shows all the account activity that has occurred that quarter, IFTs as well as biweekly contributions. I think you can figure out from those records what is really true re selling existing shares vs. buying new shares to ADD to the existing shares.


That's just it. It doesn't seem to be an ADDing to existing shares when you do an IFT. Contributions look like an ADDing to existing shares, but DCA does not seem to work if you make an IFT. DCA is a B&H strategy with contributions to stocks every two weeks which means you ride down with the Bear market ( no capital perservation).:sick:
 
We agree about DCAing into falling market, that's why I'm completely out, biweekliesand IFT, and plan to stay that way until TA tells me time to catch the train as it goes by for an intermediate rally (trend followers unite!).
 
We agree about DCAing into falling market, that's why I'm completely out, biweekliesand IFT, and plan to stay that way until TA tells me time to catch the train as it goes by for an intermediate rally (trend followers unite!).

TA = Technical Analysis ?

What will tell you that a rally is starting?

Thanks.
 
I'm still pretty new at this, I read a book called Trend Following earlier this spring, which kind of tracked with what I was already zeroing in on with intermediate trend indicators that already interested me, which means waiting til I see the trend started, using indicators that will put me in reactive mode. I tend to study conditions a bit too thoroughly and slowly at times, so I'm not good at the daily in-out jumps, am more comfortable seeing things build and waiting for confirmation that an intermediate trend started (my intermediate might be some other peoples "short-term"-Market Gauge defines short term that way anyway).

I don't know when a rally will start precisely, but I'll know it when I see it's started. I've been talking about this sporadically and somewhat cryptically in my thread, the indicators I've been learning about and watching and studying for entry signals include MACD, SAR, Keltner channels (which I haven't mentioned previously), ADX signals (that one is pretty complex and only really good for entries, not exits), and when I see the entire daily price range make it over the 5-day moving average coming up from below (HLC symbols or candles). I have occasionally jumped the gun and gone with a strong candle reversal signal, and had mixed success so far-its too quick for our 2x/month IFT situation.

One fairly good but imperfect intermediate exit signal seems to be when the HLC/candle drops more than halfway below the 5 day MA. I'm still working out other exit signals that will be more helpful in this upcoming bear rally environment (I'm not sure when the rally will actually start-it came close earlier this week in C, and was starting to move that way in I but no confirmation happened. I chose to miss the current/recent F rally crossover in favor of waiting for the "big one in stocks".

I don't rely on one signal alone, I'm always looking for 2 signals or more in combination to confirm these "intermediate" rallies have started, and for the other indicators to be moving that direction or close to getting there. For the return of the "bull" longer term, I'm waiting on the cross-up of the 20week over the 50 week (Karl Denninger's writings put me onto that one over at Market Ticker-we came close awhile back but never got there). I'm using my tracker account here to try different ideas, not always doing precisely the same thing in real account, but fairly close, timing a little different sometimes. I'm up over 2% in real account right now vs. tracker (-2%) due to slight timing diffs. If you'll notice I stayed out of the game this whole past week-none of my signals had hit yet, so I'm still waiting til 2 or more do in 1 of the funds-who knows when it will happen? I don't.
 
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