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Thursday, April 9, 2009

Dollar cost averaging - DCA

Dollar cost averaging - DCA

What is dollar cost averaging, should we follow it as a methodical approach for investment


So what is a DCA


Its the method of investing a fixed dollar amount at regular intervals weekly,monthly, per paycheck, in a particular investment or portfolio, regardless of its share price. In this way, more shares are purchased when prices are low and fewer shares are bought when prices are high


The key here is to select an investment vehicle or a portfolio that is very well diversified, managed, reviewed in periodic intervals and re-structured based on market leading indicators,drivers etc
There are many options for that, you can look into Target time funds from TRowePrice, Fidelity, TIAA-CREF etc or Managed portfolios from Amex, Fidelity, Merril Lynch, charles schwab etc
So why is DCA very important
It imposes a regime and spreads the risk in buying points, Say you felt 10,000 is the bottom of the market ( atleast i thought) and invested a heavy sum at 10,000(DOW) it could prove to be a dangerous strategy rather if you spread out 1000$ every paycheck into a very diversified portfolio from DOW 10,000 to 7000 levels and back up from 7000 to 8000 levels the spread would be lesss risky and also at various different spike points in the market that the average yield will be better
If you could wait and invest all your money at DOW sub 7000 , in my opinion you should not be doing a day job rather work in managing money !!!!!
So 401k contributions are a great example of dollar cost averaging, even if you chose to you cannot time the market as your employer will auto credit it to your account and it will be allocated immediately based on your model. well you can always allocate to CASH and the split and dice it if you are a PRO, But staying out of the market in CASH has its negatives too,
when you sit out and dont enjoy the 1, 2,3% daily spikes thats really when the portfolio hurts
So i want to learn about your thoughts on DCA and how you have efficiently practised it and been successful
Give me your thoughts

2 comments:

  1. Cost averaging strategy in investments is always good. It minimizes your profits as well as losses. Don't know if you are into options trading. I'm a big time options trader. We should talk sometime about it....Nice blog Sada!!!

    Bharath

    ReplyDelete
  2. Sure Bharath we can chat about Options
    i really dont have the bandwidth to do options trading

    ReplyDelete