Author Topic: Modified Dollar Cost Averaging on 401k Contributions.  (Read 5950 times)

hedgefund10

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Modified Dollar Cost Averaging on 401k Contributions.
« on: March 20, 2016, 11:49:11 AM »
Does anyone change their contribution into their 401k based on the level of the Market? For example I do the following:

The S&P made a high at 2130. Every 10% down off this level I increase my contribution. My levels are:

2130 - 6% (this is the baseline, at this level I get the maximum company match)

1917 - 10%

1704 - 15%

1491 - 20%

1278 - 25%

1065 - 30%

Obviously if the S&P makes a new high, I would adjust the levels.
« Last Edit: March 20, 2016, 07:05:22 PM by hedgefund10 »

I'm a red panda

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Re: Dollar Cost Averaging on 401k Contributions.
« Reply #1 on: March 20, 2016, 12:35:45 PM »
I don't try to time the market.  I just max my 403b, with even contributions throughout the year.

slugline

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Re: Dollar Cost Averaging on 401k Contributions.
« Reply #2 on: March 20, 2016, 03:31:13 PM »
Varying your investment amount based on share price is pretty much the opposite of dollar cost averaging.

The way I see it, I have a target amount in mind for tax-deferral. So I contribute that into the 401(k) no matter what. If I was inclined to be a market timer (and I'm not), I would just pick another investment if I felt a stock fund was too expensive. There's always the option to exchange that into stock-fund shares later when they're cheaper.

hedgefund10

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Re: Dollar Cost Averaging on 401k Contributions.
« Reply #3 on: March 20, 2016, 04:30:12 PM »
Varying your investment amount based on share price is pretty much the opposite of dollar cost averaging.

The way I see it, I have a target amount in mind for tax-deferral. So I contribute that into the 401(k) no matter what. If I was inclined to be a market timer (and I'm not), I would just pick another investment if I felt a stock fund was too expensive. There's always the option to exchange that into stock-fund shares later when they're cheaper.

Not really, it is just dollar cost averaging at a lower price. Why would you want to buy the same amount at higher prices?

I'm a red panda

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Re: Dollar Cost Averaging on 401k Contributions.
« Reply #4 on: March 20, 2016, 05:41:02 PM »
Varying your investment amount based on share price is pretty much the opposite of dollar cost averaging.

The way I see it, I have a target amount in mind for tax-deferral. So I contribute that into the 401(k) no matter what. If I was inclined to be a market timer (and I'm not), I would just pick another investment if I felt a stock fund was too expensive. There's always the option to exchange that into stock-fund shares later when they're cheaper.

Not really, it is just dollar cost averaging at a lower price. Why would you want to buy the same amount at higher prices?

Because you can't guarantee the market drops and you might miss the opportunity to buy using your plan.

hedgefund10

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Re: Dollar Cost Averaging on 401k Contributions.
« Reply #5 on: March 20, 2016, 06:12:25 PM »
Varying your investment amount based on share price is pretty much the opposite of dollar cost averaging.

The way I see it, I have a target amount in mind for tax-deferral. So I contribute that into the 401(k) no matter what. If I was inclined to be a market timer (and I'm not), I would just pick another investment if I felt a stock fund was too expensive. There's always the option to exchange that into stock-fund shares later when they're cheaper.

Not really, it is just dollar cost averaging at a lower price. Why would you want to buy the same amount at higher prices?

Because you can't guarantee the market drops and you might miss the opportunity to buy using your plan.

The market always drops. This sounds like something from the bubble days of real estate "Prices are going up and up don't miss this opportunity to buy now". Besides I always have the 6% on.

Telecaster

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Re: Dollar Cost Averaging on 401k Contributions.
« Reply #6 on: March 20, 2016, 06:26:42 PM »

Not really, it is just dollar cost averaging at a lower price. Why would you want to buy the same amount at higher prices?

Err,

Quote
Dollar-cost averaging (DCA) is the technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.

http://www.investopedia.com/terms/d/dollarcostaveraging.asp

When you say "dollar cost averaging" that's what everyone thinks you are talking about.  Now you are saying you have own special, definition that only you know about. 

Rather than arguing that your own made-up personal definition is the correct one, it is probably easier to use words and terms in the same way everyone else does, and come up with a new term to describe your strategy, instead of arguing the rest of the planet is wrong, and you are right.   

And hey, the rest of the planet might be wrong, but your attempts to confuse people by switching definitions are clearly working.   


msilenus

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Re: Dollar Cost Averaging on 401k Contributions.
« Reply #7 on: March 20, 2016, 07:01:59 PM »
I max out my 401(k) as early as possible every year, just to optimize for time in market.  My match is structured so that this isn't penalized.  Timing worked out reasonably well this year, which was a nice bonus.

hedgefund10

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Re: Dollar Cost Averaging on 401k Contributions.
« Reply #8 on: March 20, 2016, 07:06:00 PM »

Not really, it is just dollar cost averaging at a lower price. Why would you want to buy the same amount at higher prices?

Err,

Quote
Dollar-cost averaging (DCA) is the technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.

http://www.investopedia.com/terms/d/dollarcostaveraging.asp

When you say "dollar cost averaging" that's what everyone thinks you are talking about.  Now you are saying you have own special, definition that only you know about. 

Rather than arguing that your own made-up personal definition is the correct one, it is probably easier to use words and terms in the same way everyone else does, and come up with a new term to describe your strategy, instead of arguing the rest of the planet is wrong, and you are right.   

And hey, the rest of the planet might be wrong, but your attempts to confuse people by switching definitions are clearly working.

There I changed the the title of the thread.

Peter Parker

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #9 on: March 20, 2016, 07:47:47 PM »
So what if the S&P goes from 2130 to 4000 over the course of the next 20 years, will you only contribute 6% each year?  I'm confused. 

hedgefund10

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #10 on: March 20, 2016, 08:30:30 PM »
So what if the S&P goes from 2130 to 4000 over the course of the next 20 years, will you only contribute 6% each year?  I'm confused.

Numbers will be adjusted based on new highs made and any 10% or greater pullbacks made from 2130 to 4000.

mrpercentage

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #11 on: March 20, 2016, 09:02:51 PM »
In regular accounts buying things like the S&P500--- No I always contribute the same amount. I do very my direct stock purchases. Cramer does adjust the amount though. He doubles down during hard times I think.

However,
I recently changed how I handle my 457.

My plan is: I will always buy bonds or put them in a short term bank account (an option for my 457) and then roll it into stocks everytime they take a big dump. Then I will just keep those stocks. Yes I have decided to time stock purchasing in my account. I admit it. Im buying vanguard total bond market right now and will roll it into VINIX, VSCIX, or PAMCX the next significant correction/dip. I am just telling you what Im going to do. I am not telling anyone to do it. I suspect the first roll over will happen mid summer or early next year. I doubt it will take long.


Scandium

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #12 on: March 21, 2016, 07:20:09 AM »
So what if the S&P goes from 2130 to 4000 over the course of the next 20 years, will you only contribute 6% each year?  I'm confused.

Numbers will be adjusted based on new highs made and any 10% or greater pullbacks made from 2130 to 4000.

So if there is a decade with only 9% pullbacks and spectacular growth you would only contribute 6%?

And you don't say when you would change it down again. If you bump up to 20% would you ever turn it back down to 6%?

MrDelane

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #13 on: March 21, 2016, 08:00:33 AM »
I'm not certain how other people's 401K work, but at my workplace if we change the contribution percentage it takes at least 1 pay cycle, sometimes 2, before it takes effect. 

So, by the time I could change my contribution amount the market would have done something different anyhow, and I would constantly be chasing the ups and downs.

(not that this doesn't already sound like a bad idea for a variety of other reasons)
 

slugline

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #14 on: March 21, 2016, 08:29:13 AM »
I'm not certain how other people's 401K work, but at my workplace if we change the contribution percentage it takes at least 1 pay cycle, sometimes 2, before it takes effect. 

So, by the time I could change my contribution amount the market would have done something different anyhow, and I would constantly be chasing the ups and downs.

(not that this doesn't already sound like a bad idea for a variety of other reasons)

Mine works this way. And, yes, this is why I find it questionable to tinker with contribution levels based on current market conditions. Let us not lose sight of why we like 401(k)s in the first place -- stashing money inside a tax-deferred wrapper. That should be the marquee attraction.

The chosen asset allocation inside the wrapper is a secondary question, unless your specific plan has a terrible menu of investment choices. Mine offers some bond/income/stable-value fund options if I'm not ready to buy stock funds for some reason. Once money is inside my 401(k), I can juggle its asset allocation around at will and have the orders go through in about one business day.

I'm a red panda

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Re: Dollar Cost Averaging on 401k Contributions.
« Reply #15 on: March 21, 2016, 08:46:56 AM »

The market always drops. This sounds like something from the bubble days of real estate "Prices are going up and up don't miss this opportunity to buy now". Besides I always have the 6% on.

No, not real estate bubble.  It's more like "you have no idea what prices are going to do, so get in now".  Time in the market beats almost everything else.  That's why people dollar cost average.

But you don't know when it will drop, or to what level.  Or how long it will stay there. This plan of yours is market timing, plain and simple. And market timing rarely works.  It is not dollar cost averaging.


halfshellmeijin

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #16 on: March 21, 2016, 12:11:10 PM »
What do you do with the other money when you are not putting it into your 401k?

Anyways, I have heard of dynamic asset allocations where maybe you are 70/30 stock/bond but when the stock market falls you shift your contribution to 71/31 or 72/32. Doing this with a defined investment plan like you stated, but always contributing the same amount.

JLee

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #17 on: March 21, 2016, 01:35:19 PM »
What happens if December rolls around and you haven't maxed your 401k yet?

BlueHouse

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #18 on: March 21, 2016, 02:39:19 PM »
Why don't you just make your default contribution account a Money Market fund and then wait until the day you think you should buy into your preferred fund?  Wouldn't that be easier and give you the same result?

halfshellmeijin

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #19 on: March 22, 2016, 04:12:09 AM »
What do you do with the other money when you are not putting it into your 401k?

Anyways, I have heard of dynamic asset allocations where maybe you are 70/30 stock/bond but when the stock market falls you shift your contribution to 71/31 or 72/32. Doing this with a defined investment plan like you stated, but always contributing the same amount.

Opps! I meant you shift the allocation to 71/29 or 72/28. This way you buy more when the stocks go down. Hopefully achieving the results you want.

MustacheAndaHalf

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #20 on: March 22, 2016, 04:33:25 AM »
Telecaster - Agree with you both here and in the other thread.

hedgefund10 - Two threads created, and in both threads you insist on your own definition of phrases.  First "wealth tax" and now "dollar cost averaging".  If everyone says one thing, and you say another - especially about language - you're probably wrong.

Kaspian

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Re: Modified Dollar Cost Averaging on 401k Contributions.
« Reply #21 on: March 22, 2016, 09:26:58 AM »
While "buying the dips" with extra cash (if you have some on hand) has been shown to be generally advantageous, I'm afraid all your fancy footwork likely isn't worth the time/effort you put in.  There are tons of studies which show complicating or thinking you're clever result in underperforming the market or coming ahead a negligible amount.  It's like those guys you see speeding dangerously on highways for hours and you find out they arrived at the destination only 2 minutes before the guy who did the limit. 

I think if you gives you a rush, you enjoy making up your own system, and it gets you to the destination, that's cool.  I wouldn't knock it.  But I'd also say not to lie to yourself saying it's somehow more efficient or smarter than if you just did what the majority here advise.
« Last Edit: March 22, 2016, 09:28:32 AM by Kaspian »