Author Topic: 2 questions about DCA and diversification  (Read 1945 times)

Kilbim

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2 questions about DCA and diversification
« on: June 05, 2016, 11:54:47 AM »
Hi all, it's me again. I have 2 simple questions.

About DCA: are you supposed to keep investing the same amount every month/quarter/whatever? What happens if you invest for a period of time a certain amount, and then you switch to investing less/more? Pratical example, investing 500/month for 2 years, and then for 5 years after that investing 100/month. What happens here? Is it still a good DCA?


About diversification: what happens you include some assets only later in your portfolio? Are you supposed to have less invested in more assets, or build 1 asset after another. So, is it better to invest 100 dollars in 5 different assets until you reach 1000 in each, or is it better to bring one of the assets to 1000, and start investing in the others only later? What are the plus and minuses of both strategies?

Thanks all :)

matchewed

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Re: 2 questions about DCA and diversification
« Reply #1 on: June 05, 2016, 12:53:53 PM »
There is no such thing really as a "good" or "bad" DCA (except for perhaps extreme examples). You just either employ that method or not. For your example the answer is just that you're investing less after your initial two years which may or may not be part of your particular plan.

So asset allocations and diversification are all about risk management essentially. Neither of the two scenarios you listed are "better". There is no inherent advantage one can point at with either other than how you as an individual react to the performance. For example if you are doing your second strategy (bringing an asset one at a time to $1k, which is a small small amount frankly, so let's make it $10k) if that particular asset drops 30% and you react poorly by selling on the drop then your strategy is flawed for your particular risk tolerance. If keeping them equal so you have only $2k in each of five assets and one of the assets drop 30% you probably won't notice the blip all that much. So it smooths the psychological impact of loss (if that sort of impact is a problem to you, which it may not be).

So in short there is no clear direct answer to your question. Pick one and go with it.

Choices

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Re: 2 questions about DCA and diversification
« Reply #2 on: June 05, 2016, 01:03:59 PM »
I agree with matchewed. Your strategy here doesn't matter nearly as much as the amount you invest. Be frugal, be mustachian! Pay off debt, then pour every cent you can spare into investments. Before you know it you'll have $100K in each asset class.

Kilbim

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Re: 2 questions about DCA and diversification
« Reply #3 on: June 05, 2016, 02:01:13 PM »
There is no such thing really as a "good" or "bad" DCA (except for perhaps extreme examples). You just either employ that method or not. For your example the answer is just that you're investing less after your initial two years which may or may not be part of your particular plan.

So asset allocations and diversification are all about risk management essentially. Neither of the two scenarios you listed are "better". There is no inherent advantage one can point at with either other than how you as an individual react to the performance. For example if you are doing your second strategy (bringing an asset one at a time to $1k, which is a small small amount frankly, so let's make it $10k) if that particular asset drops 30% and you react poorly by selling on the drop then your strategy is flawed for your particular risk tolerance. If keeping them equal so you have only $2k in each of five assets and one of the assets drop 30% you probably won't notice the blip all that much. So it smooths the psychological impact of loss (if that sort of impact is a problem to you, which it may not be).

So in short there is no clear direct answer to your question. Pick one and go with it.

Great, thanks a lot for your answer!

nobodyspecial

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Re: 2 questions about DCA and diversification
« Reply #4 on: June 05, 2016, 02:34:09 PM »
About DCA: are you supposed to keep investing the same amount every month/quarter/whatever? What happens if you invest for a period of time a certain amount, and then you switch to investing less/more?
DCA generally means that if you have a large lump sum should you invest it all at once or put a small percentage in each month/year for many years, to avoid the risk of a major market downturn just after you invest.
Statistically the odds are that you will do better by putting all the money in on day one - markets generally go up and crashes are rare - which is why people say DCA is a bad idea.

Making regular investments each paycheck is a good idea - but it's not 'formally' DCA
 
« Last Edit: June 05, 2016, 02:48:41 PM by nobodyspecial »

Kilbim

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Re: 2 questions about DCA and diversification
« Reply #5 on: June 05, 2016, 02:43:11 PM »
About DCA: are you supposed to keep investing the same amount every month/quarter/whatever? What happens if you invest for a period of time a certain amount, and then you switch to investing less/more?
DCA generally means that if you have a large lump sum should you invest it all at once or put a small percentage in each month/year for many years, to avoid the risk of a major market downturn just after you invest.
Statistically the odds are that you will do better by putting all the money in on day one - markets generally go up and crashes are rare - which is why people say DCA is a ad idea.

Making regular investments each paycheck is a good idea - but it's not 'formally' DCA
 

Yes, I read the paper of vanguard about this. It also says DCA is better if you don't know how you would react in a big crash, it prevents you from acting stupid. So I am interested in this :)

talltexan

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Re: 2 questions about DCA and diversification
« Reply #6 on: June 06, 2016, 01:18:51 PM »
Set your investment amount to $500/month. If you have three different asset classes, set it to buy one in January, April, July, October. A different one the next month. Look at it and rebalance once/year to make them equal.