It's Time to Re-visit your Dollar Cost Averaging Scheme
Everybody knows what Dollar Cost Averaging is by now. Even if you don't particularly believe in it working 100% of the time every time, it prompts two things:
- Utilizing DCA makes you pay attention to the markets and your investments!
- Utilizing DCA makes you pay attention to how much you should be saving!
Even the smartest of intellectuals has a hard time actually proving that DCA does not work. So let's assume for the sake of argument that you can't beat the markets using it. Dang well then why bother? I just told you. It prompts you to pay attention. After all, if you just have a certain block of money you invest every month, you really never have to pay attention to where it goes and how much it is returning, and I get that. The repeating deposit method works good and is probably ideal if you are a busy butt or just not a particularly performance-oriented individual. You will 100% do fine that way and I will not knock your decision. Except this once.
Technically you have already embarked on a DCA scheme when you selected how much money to invest per month and what your stock allocation was going to look like. Then you just got lazy and didn't ever check on those values again. You should at a minimum be asking yourself whether you can invest more every month or whether your current risk allocation is appropriate. That's it in a nutshell. Either way - it's time.
I guess you could either time this based on monthly intervals or just look at your accounts every 2 or 3 months. Whatever works for you. Personally, I base it on performance of the market at any given interval where it changes, kind of like a programming interrupt sequence. If change +/->.5% m-o-m then it triggers my brain and I put it into gear from park. Quite a painful process and an even more painful analogy. Lucky for us, the market has been consistently performing for at least 11 months now so there has been no need to re-adjust, but you still should have been watching it anyways right? You don't have anything better to do right? Well, as it turns out, neither do I.
Alright, so I will dust off this old example piece from our original article:
Let's say that prior to this month we have been experiencing +1% market growth every 30 days as an average since January. If your personal DCA graph looked like the one above, where you could invest up to 400$ a month if you wanted, that would mean that you would have not been investing anything at all since January but now that the market just dipped below 1% you will want to start again. Assume that we may only see .5% for the next 30 days. That means you stick 100$ into your stocks/bonds this month and call it a day. Of course you have plenty of cash handy since you haven't been investing top dollar for a while now, so this is easy to do.
Now that wasn't so hard was it?
A few words about creating your own personal "DCA graph" like the one I showed above. Here is my input on the creation of your own personal variables:
- Maximum dollar contribution - maximum dollar amount you can afford to plop into stocks every month. And you have to assume this is a long term investment, no take backs here. You absolutely need to have your safety net somewhere else, or else risk becomes too big of a factor and you will end up compromising your long term returns.
- Minimum dollar amount - If we are honest with ourselves, this shouldn't be zero. Let's say for the sake of argument that you should at a minimum invest 25% of your maximum value even when the market is a superman/bull hybrid. So if 400$/mo was your max contribution, then 100$/mo would be your min.
- Scale of the percent market yield axis-
- For month over month, you would want to be halfway between your min/max when the market is flat-lining. That implies that the positive and negative limits are symmetrical about 0%. However, If you have a year over year average schedule your middle percentage would be closer to the historical average of 7%, which is to say 7% increase y-o-y would implore you to input halfway between your max and minimum values.
- Your maximum and minimum market movement values should be symmetrical, but how wide should they run? For month over month stick with the +/-1% above. For y-o-y, stick with +/-7%. After the market reaches a limit of your graphs' fluctuation, assume that the derivative value is saturating your control input to one of the extreme dollar levels you calculated above.
Breathe with me here. Hold hard. It will be alright.