Author Topic: Strategy for putting monthly Savings into Index Funds  (Read 6903 times)

smoothieking

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Strategy for putting monthly Savings into Index Funds
« on: May 02, 2013, 02:18:18 PM »
Hi All,

Investing newbie here...

I have automatic transfers going into my Vanguard index fund (VFIAX) every Friday and then at the end of the month we manually put any remaining savings in there as well. I guess a type of dollar cost avg with our monthly savings.

We often end up getting to put a decent chunk of extra savings (on top of the auto transfers) at the end of each month.

Lately, I've been following the S&P and on days where the market goes down a decent amount - say .5%-1%, I will put in extra $$ right then and there in an attempt to buy when there is a "sale" or dip in the market.  I'm not trying to time the market in the sense that I am ever selling anything, but I just try to time my purchases.

My question is - is this just silly, should I just increase my auto transfers since we often have more $ to save at the end of each month or do you think this is a decent strategy?

I would be interested in anybody's take on this.

Thanks for your time.

matchewed

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Re: Strategy for putting monthly Savings into Index Funds
« Reply #1 on: May 02, 2013, 02:26:50 PM »
All you are doing is a combination of DCA and timing the market. If you're method of timing the market is just waiting for a drop... any drop then I guess it isn't really based on emotions but it's not really methodical IMO.

If I were in your shoes and left with an larger than anticipated amount of money at the end of each week for investing then I'd just up my DCA. It removes the emotional swings of watching the stock market (unless that's your thing) and allows you to go on with your life and have fun (again unless that's your thing which lets you have fun and you like watching graphs move).

the fixer

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Re: Strategy for putting monthly Savings into Index Funds
« Reply #2 on: May 02, 2013, 02:52:52 PM »
Suppose that EVERY time you bought shares, you were able to successfully time the market and save 1% off when you would otherwise buy if it was a pure DCA. Now suppose you hold those shares for 10 years, then sell. In this example, your market timing strategy increased your average annual returns by a whopping 0.1%.

I was doing this when I started investing, and it seems like a common temptation for others when they start, too. But it's really just a waste of time. If you want to time the market, you need to do it with buying and selling so you can realize your immediate gains and put them to work somewhere else. If you instead believe in buy-and-hold (which you should), the exact price at which you buy isn't going to matter in the long run.

Cecil

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Re: Strategy for putting monthly Savings into Index Funds
« Reply #3 on: May 02, 2013, 04:58:36 PM »
Quote
on days where the market goes down a decent amount - say .5%-1%, I will put in extra $$ right then and there in an attempt to buy when there is a "sale" or dip in the market.

I know it seems to make sense, but this is a losing game. What are you doing with that money while you "wait" for a sale on stocks? What if you wait for a dip and we have a week like we did last week where the market goes up every day and ends the week 2-3% higher than it started? Now you've missed out on a bunch of gains.

Since on average the stock market goes up, and you can't predict which way it's going, you're always better off invested than not. Unless you can predict things, in which case I'd like to subscribe to your newsletter.

Kriegsspiel

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Re: Strategy for putting monthly Savings into Index Funds
« Reply #4 on: May 02, 2013, 05:09:54 PM »
He is putting money into it regardless.  On days when the market is really down, he puts more in.  So there is no "waiting it out," there's just buying MORE when shares are "cheaper," I don't really see this being a bad thing.

JohnGalt

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Re: Strategy for putting monthly Savings into Index Funds
« Reply #5 on: May 02, 2013, 05:13:26 PM »
He is putting money into it regardless.  On days when the market is really down, he puts more in.  So there is no "waiting it out," there's just buying MORE when shares are "cheaper," I don't really see this being a bad thing.

If he has money sitting around to be put in when the market is down, it seems like he is doing at least some amount of "waiting it out."

That said, I don't see anything wrong with the strategy - though it's likely not worth the effort your putting into it. 

Mr Mark

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Re: Strategy for putting monthly Savings into Index Funds
« Reply #6 on: May 02, 2013, 07:38:58 PM »
Quote
on days where the market goes down a decent amount - say .5%-1%, I will put in extra $$ right then and there in an attempt to buy when there is a "sale" or dip in the market.

I know it seems to make sense, but this is a losing game. What are you doing with that money while you "wait" for a sale on stocks? What if you wait for a dip and we have a week like we did last week where the market goes up every day and ends the week 2-3% higher than it started? Now you've missed out on a bunch of gains.

Since on average the stock market goes up, and you can't predict which way it's going, you're always better off invested than not. Unless you can predict things, in which case I'd like to subscribe to your newsletter.

+1

And missing half the dividends of whatever that float is...

And missing out on other things to do.

Joet

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Re: Strategy for putting monthly Savings into Index Funds
« Reply #7 on: May 02, 2013, 07:45:43 PM »

Since on average the stock market goes up, and you can't predict which way it's going, you're always better off invested than not. Unless you can predict things, in which case I'd like to subscribe to your newsletter.

:) Harsh but true! :)

Leisured

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Re: Strategy for putting monthly Savings into Index Funds
« Reply #8 on: May 15, 2013, 11:22:50 PM »
There is an old strategy, Smoothieking, which I recommend, called dollar cost averaging. Invest a constant amount, every month, say. If the market is down, your contribution buys more stock because the price is lower, if the market is high, your contribution buys less stock because the price is higher. The process is automatic, and there is no need to try and time the market.

typisk

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Re: Strategy for putting monthly Savings into Index Funds
« Reply #9 on: May 20, 2013, 08:55:03 AM »
Not the same question, but this is my situation:

I save in three index funds (does not live in U.S); Global, national and growth. I've planned to save 1000$ in each fund per month, but I'm thinking of weighting the deposit depending on growth last month.

Let's say Fund A is +5%, Fund B +0% and Fund C -5% last time i buyed. Instead of distribute 1000$ evenly, I could deposit 800$ to Fund A, 1000$ to fund B and 1200$ to Fund C.

Is this strategy better than just do a plain 1000$ deposit on each fund?

Regards,
Newbie

GreenGuava

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Re: Strategy for putting monthly Savings into Index Funds
« Reply #10 on: May 20, 2013, 09:02:37 AM »
Is this strategy better than just do a plain 1000$ deposit on each fund?

Hi,

It sounds like you're trying to do a variant of what's called Value Averaging - wherein you have a goal dollar amount for each fund to reach each month (or whatever time period), and you put in an amount of dollars to get each to that amount.

It isn't strictly that, but it's close.  Value averaging tends to do better than dollar cost averaging.

If this is in a taxable account, it also has the effect of keeping your asset allocation (and thus, the portfolio's risk profile) closer to your desired one.  In a tax-advantaged account, this is generally achieved by annual re-balancing, but it's common in taxable to use new contributions to push towards that instead.

In short, yeah, it's a good plan.  Depending on your current balance, though, the contributions might matter more than where you put them, so it isn't going to be phenomenally better.