# How to enhance Dollar Cost Averaging of index etf's and related topics



## Pluto (Sep 12, 2013)

This is for those who use a dollar cost averaging strategy by buying index etf's, and have an open mind about possible improvments on the approach. With the following strategy you can beat the index you are buying, without adding any risk. With this post, there should be a TSX chart attached with a 270 day ma. 

This 2008 - present chart has a 270 day (54 week) ma. Apparently there are a lot of folks engaged in Dollar Cost Averaging, of various securities and index etf's among them. In theory I kind of like the DCA strategy. But there is something about it that bugs me, namely, in a bull market one is averaging *up*. That part doesn't make sense. It occurred to me that if a dollar cost averaging strategy was merged with a moving average strategy the results would easily be enhanced with little or no added risk. In fact, the risk is probably reduced, while increasing profits. 

The strategy is this: dollar cost average (make regular constant dollar purchases) while the index is below the 270 day ma, and suspend buying (but continue saving) when the index is above the 270 day ma. To me, even with out doing the math, its a no brainier. Intuitively, one can see that their average cost is going to be much lower compared to the standard DCA rules. By using this strategy you will automatically begin to out perform the index you are buying. 

The 270 day/54 week moving average was picked because of the research described in the book, The Encyclopedia of Technical Market Indicators (1st Ed)

I do anticipate possible criticism of this approach:

1. That's market timing, you can't do that. Answer: Why can't I? "You can't do that" is an assumption that the naysayers simply don't examine carefully. It's plain as day that the above described strategy enhances returns for an index dollar cost averaging approach in a way that does not involve any guess work, crystal ball gazing, or voodoo economics. 
2. That's technical analysis, it doesn't work. Answer: Claiming it doesn't work is just an assumption that is probably based on the spectacular failure of some famous market timers. The generalization that technical analysis doesn't work is an inaccurate conclusion tied to the fact that the majority of these indicators aren't very useful. The good indicators/strategies get thrown out with the bad.


----------



## Rusty O'Toole (Feb 1, 2012)

Everybody knows how to make money - buy low sell high - but nobody will tell you what is low or high. Now you have a mechanical definition of low and high. I think you are onto something. Have you back tested it? In any case I don't see how you could go wrong. At worst the market could take off straight up and there you would be, stuck with a bunch of cash ha ha.


You should look up Robert Lichello's AIM (automatic investment management) for another slant on the same subject. Tom Veale has done a lot of work on this, you can find his web site if you search Tom Veale AIM.


----------



## cainvest (May 1, 2013)

Just setup your rules and back test it, all the data is readily available. Then you can see how well it works (and how much of a gain you'll get) or if it doesn't work. I'm interested in seeing the results.


----------



## GoldStone (Mar 6, 2011)

SPY crossed above 270 day SMA at the end of 2011. It stayed above ever since. There were two moments in 2012 where SPY briefly tested the line, but it never crossed below.

SPY is up 49% since the end of 2011 (including the dividends). In Canadian dollar terms, it's up 60%.

Your strategy would have left the entire gain on the table.

Nuff said.


----------



## GoldStone (Mar 6, 2011)




----------



## richard (Jun 20, 2013)

Sounds great... once you put your portfolio into this strategy and do it for 5 years I can't wait to hear what the results are!


----------



## Potato (Apr 3, 2009)

Further to GoldStone's post, even in the OP's attached chart of the TSX it doesn't work. All through 2009 was prime buying time, but this strategy turned off the taps around July ~10.5k. Then you buy in again on a dip in mid-2010 at 11.5k. All that time the index yield was equal to or above that of savings accounts too. Again in 2010 you'd stop buying at 11.5k, only to then invest at nearly 13k in 2011. In 2008 you wouldn't have invested _right _at the peak, but near enough in that first dip down before even Lehman.

Plus, how do you deal with the emotional aspects of staying out of the market for a year or more, then buying in all at once on a tiny dip that's still higher than where you got out?




Pluto said:


> To me, even with out doing the math, its a no brainier.


I know Han doesn't like Threepio to tell him the odds, but you should always do the math.


----------



## GoldStone (Mar 6, 2011)

2003-2009 was a brilliant test of this strategy.

SPY crossed above 270d SMA on April 28, 2003. SPY stayed above the line until the end of 2007.

2003 - save cash.
2004 - continue saving.
2005 - continue saving.
2006 - continue saving.
2007 - continue saving.
2008 - SPY drops below 270d SMA. Finally, we can put our cash pile to work!!

We all know what happened next. 50% drawdown.

See attached chart.


----------



## webber22 (Mar 6, 2011)

The 50 day SMA would work. Some think the crossover of 50-day and 200-day averages signal new bull or bear market impulses.
Most of these systems fail since most of the buys have to be made during gut-wrenching declines.


----------



## cainvest (May 1, 2013)

GoldStone said:


> SPY crossed above 270 day SMA at the end of 2011. It stayed above ever since. There were two moments in 2012 where SPY briefly tested the line, but it never crossed below.


I see June 1st and 4th 2012 below but clear sailing after that ...


----------



## GoldStone (Mar 6, 2011)

cainvest said:


> I see June 1st and 4th 2012 below but clear sailing after that ...


Barely below. You blink and the buying moment is gone. It's gotta be a gut-wrenching experience.


----------



## cainvest (May 1, 2013)

GoldStone said:


> Barely below. You blink and the buying moment is gone. It's gotta be a gut-wrenching experience.


No kinding ... just imagine if you took an extra long weekend for those two days .... oh, the pain. 

Honestly, I don't think there is a timing model that covers DCA without risk, that being risk of losing gains here. I have run a fair number of timing models, for reasons other than DCA timing, and they all have risk.


----------



## Pluto (Sep 12, 2013)

I should clarify to address GoldStone's concerns. Part of the feedback I got from people on the board is that a lot of folks use a dollar cost average strategy partly because they don't have a pile of cash to invest or to allocate.They are saving maybe 500 - 1000 a month, and make regular purchases of some etf on a monthly basis in order to build up some retirement stash over a period of 20 - 30 years. These are the people I'm speaking to. Feedback I got from such folks was things like "buy anytime" and "buy when you have the money", and although buy anytime may work, I think it can be enhanced. So when you use SPY to show it won't work, you should really look at a 20 - 30 year chart. Then I think it will work. Moreover, people could actually use two, three, or more etf's to address your concerns. Supposing some one used SPY and XIU, and XSB. During the time that spy was above the ma, there was still plenty of opportunity to buy into xiu below the ma. If both spy and xiu got above the ma at the same time, they could buy XSB. Later when SPY and/or XIU were below the ma, they could sell XSB, and average into the stock etf's. I know you are happy with your asset allocation strategy, and you buy bonds, so what would be wrong with storing some cash in XSB until low prices emerged in SPY and XIU? This strategy gets them out of cash and into equities at lower prices than they would have otherwise. 

My thoughts on this are only for people who already use Dollar Cost Averaging, and who are open to looking at ways to enhance an approach they already use. Apparently they use DCA because they do not have the time or inclination to devote to more complicated methods. My proposal is not complicated, and takes no extra time or effort, and by virtue of a lower average cost, can achieve greater gains over a 20-30 year time frame.


----------



## Pluto (Sep 12, 2013)

GoldStone said:


> 2003-2009 was a brilliant test of this strategy.
> 
> 
> 
> ...


You seem to be forgetting that my proposal is for people who already use dollar cost averaging. They would have been making regular purchases all the way up, and when the decline came, there would have been a draw down on everything they bought on the way up. Too, according to the standard dollar cost averaging rules they would be buying on the way down too. 

However, By *averaging in* what they saved, they end up with a lower cost base. Averaging in means *not* committing all that saved cash at once - spread it out. Too, if they had saved cash left when the index later crossed above the ma, they could put all their remaining cash in at that time. 

Too, you switched to spy, when I was talking about the TSX, possibly xiu. Someone could use both spy and xiu, plus xsb. I think you are not against bonds, and you don't think that your money in bonds is not working. Anyway, over a period of 20-30 years, I don't think it would be worse than normal dollar cost averaging which requires buying all the way up and all the way down anyway.


----------



## cainvest (May 1, 2013)

There was a discussion last year on timing models when GoldStone brought this paper up -> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461 by Faber, it's a good read and does show results.


----------



## GoldStone (Mar 6, 2011)

Pluto said:


> Then I think it will work.


You think??

The onus is on you to back-test the strategy on different asset classes. US equities, international equities, real estate, bonds, commodities, etc.

The strategy should work with any asset class. After all, the only thing it cares about is price.

Test the strategy across multiple rolling time frames. 1970-2000, 1975-2005, 1980-2010, etc. To be robust, the strategy must be insensitive to the start and end dates.

Talk is cheap. Show us the data.


----------



## Pluto (Sep 12, 2013)

Rusty O'Toole said:


> Everybody knows how to make money - buy low sell high - but nobody will tell you what is low or high. Now you have a mechanical definition of low and high. I think you are onto something. Have you back tested it? In any case I don't see how you could go wrong. At worst the market could take off straight up and there you would be, stuck with a bunch of cash ha ha.
> 
> 
> You should look up Robert Lichello's AIM (automatic investment management) for another slant on the same subject. Tom Veale has done a lot of work on this, you can find his web site if you search Tom Veale AIM.


Thank you for your kind words. The way to avoid being left with a bunch of cash is to simply use all remaining cash to buy in at the cross above the ma. I will look up the references you gave.


----------



## GoldStone (Mar 6, 2011)

cainvest said:


> There was a discussion last year on timing models when GoldStone brought this paper up -> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461 by Faber, it's a good read and does show results.


Yes. Faber's strategy is the opposite of what OP proposed. Sell when an asset class crosses below 10 months SMA; buy back when it crosses above. Faber ran a thorough back test across different asset classes.


----------



## Pluto (Sep 12, 2013)

GoldStone said:


> You think??
> 
> The onus is on you to back-test the strategy on different asset classes. US equities, international equities, real estate, bonds, commodities, etc.
> 
> ...


My proposal is addressed to people who already use DCA to purchase stocks and are bent on using that strategy. So I think the relevant comparison is normal DCA vs my proposal. So if I have the time, I might do the math. I don't think people should simply dismiss it out of hand. Moreover, I am not trying to supplant or compete with your preferred asset allocation model. You are happy with it, and I am not competing with it. I am trying to come up with a simple, no effort, no extra time way to enhance DCA for those who are already committed to DCA.


----------



## GoldStone (Mar 6, 2011)

To make the results statistically significant, you have to run a LOT of back tests.

Here's an example of how it's done. It's an independent re-test of Faber's strategy referenced above.

http://gestaltu.com/2014/02/faber-ivy-portfolio-as-simple-as-possible-but-no-simpler.html


----------



## Pluto (Sep 12, 2013)

GoldStone said:


> Yes. Faber's strategy is the opposite of what OP proposed. Sell when an asset class crosses below 10 months SMA; buy back when it crosses above. Faber ran a thorough back test across different asset classes.


I am familiar with such strategies. In fact the book I mentioned in my first post tested such a strategy with the 54 week ma, and the authors preferred it. 

But it doesn't address DCA. Some people DCA with etf's and what not. They prefer it. They don't have a pile of cash to buy in and out with. They want to buy and hold. They are committing relatively small amounts of money on a regular basis, usually monthly. They don't want to spend a lot of time with other strategies. They are busy with kids, wife, work, and saving. All they want to do is buy into etf's monthly. 

It occurred to me that they spend a lot of time averaging up, and maybe that is not a good idea. So it occurred to me that by averaging into etf's below the 54 week ma, with the intent to hold forever, is likely going to get better results over 20-30 years compared to averaging up. 

Your Faber strategy is relevant for people who want to do that. But apparently those committed to DCA, buying relatively small amounts on a month basis, are not interested in his approach. For myself, I don't use a rigid DCA strategy. But others insist on it. I have no plans to try and change their ways, only to seek to enhance what they already do.


----------



## GoldStone (Mar 6, 2011)

My point is, you have to run a comprehensive back testing study to prove the benefits of your strategy.


----------



## Pluto (Sep 12, 2013)

Potato said:


> Further to GoldStone's post, even in the OP's attached chart of the TSX it doesn't work. All through 2009 was prime buying time, but this strategy turned off the taps around July ~10.5k. Then you buy in again on a dip in mid-2010 at 11.5k. All that time the index yield was equal to or above that of savings accounts too. Again in 2010 you'd stop buying at 11.5k, only to then invest at nearly 13k in 2011. In 2008 you wouldn't have invested _right _at the peak, but near enough in that first dip down before even Lehman.
> 
> Plus, how do you deal with the emotional aspects of staying out of the market for a year or more, then buying in all at once on a tiny dip that's still higher than where you got out?
> 
> ...


I'm not sure what you mean by "got out". You, or I, are not out. You, or I, just finished buying to hold for a log time, 2 or three decades, during which there will be more buying opportunities. Moreover, it doesn't require using only one etf. One or more canadian, one or two us, maybe some other countries as well. I think that we should not assume one can only use one etf. So supposing I am saving 1000 a month and I intend to buy monthly. So after a while my first etf goes above the ma. At that point I can look a other etf's. US, Brazil, Europe, or what ever. I believe if I average in monthly below the specified ma, I get lower prices and higher yields. And over 20-30 years I'll be better off compared to normal DCA rules. So once I start buying, I'm never out, I'm in for the long term. I'm just buying at lower average prices.


----------



## Pluto (Sep 12, 2013)

GoldStone said:


> My point is, you have to run a comprehensive back testing study to prove the benefits of your strategy.


I might do that. However, I understand that financial advisers routinely advise clients to DCA. Nothing wrong with that, I suppose. But I wonder if DCA has been thoroughly back tested. If it has, I'd like to get my hands on that research. Then I'd have something to compare Enhanced DCA with. 

Too, I wonder, if Financial Advisors are recommending DCA, and *it* hasn't been rigorously back tested, what then? I hope that isn't my fault.


----------



## cainvest (May 1, 2013)

Pluto said:


> Too, I wonder, if Financial Advisors are recommending DCA, and *it* hasn't been rigorously back tested, what then? I hope that isn't my fault.


I think you'll find DCA is more or less implemented to be a "savings" strategy and not truely an "investment" one. Getting the money put away, out of spending hands, and in a easier to deal with monthly budget is it's primary goal.


----------



## richard (Jun 20, 2013)

There's a difference between DCA as a strategy and as a necessity. For people who don't suddenly receive a large amount of money all at once, it is far better to invest in proportion to their income than to do it whenever they feel that the time is right. That is partly for psychological reasons since it creates a habit and trains people to ignore harmful emotions and partly because research shows that delaying an investment when you have the means to do it now is a gamble with bad odds. It's also in part because people are likely to invest more by doing this and then the FA earns a bigger fee. 

None of those have to do with any inherent advantage that comes from spreading out your investments. Of course if you did enough research comparable to what's out there already you could maybe show that there is a better way. I don't know, I just haven't seen one yet. If you did a simulation of your idea it would be very simple to do a parallel simulation of buying the same amount every month (with or without rebalancing) to compare them.

You're right that people who buy regular amounts every month are often buying on the way up. The solution would be to buy before they have the money since prices were lower then. That might be a more productive area to research.


----------



## Pluto (Sep 12, 2013)

richard said:


> There's a difference between DCA as a strategy and as a necessity. For people who don't suddenly receive a large amount of money all at once, it is far better to invest in proportion to their income than to do it whenever they feel that the time is right. That is partly for psychological reasons since it creates a habit and trains people to ignore harmful emotions and partly because research shows that delaying an investment when you have the means to do it now is a gamble with bad odds. It's also in part because people are likely to invest more by doing this and then the FA earns a bigger fee.
> 
> None of those have to do with any inherent advantage that comes from spreading out your investments. Of course if you did enough research comparable to what's out there already you could maybe show that there is a better way. I don't know, I just haven't seen one yet. If you did a simulation of your idea it would be very simple to do a parallel simulation of buying the same amount every month (with or without rebalancing) to compare them.
> 
> You're right that people who buy regular amounts every month are often buying on the way up. The solution would be to buy before they have the money since prices were lower then. That might be a more productive area to research.


You wrote above "research shows". I want to read that research. Please give me a reference. 

Also you propose a "solution" to buy before you have the money. Are you being sarcastic?


----------



## richard (Jun 20, 2013)

It's the only logical solution to the problem you stated. Also the fact that people are so often buying on the way up should be a good proof that delaying is a bad idea. It's the opposite of what you would want to do.


----------



## GoldStone (Mar 6, 2011)

Pluto said:


> Also you propose a "solution" to buy before you have the money.


Leverage.

Google 'time diversification leverage'. You will find studies with pros and cons.


----------



## Pluto (Sep 12, 2013)

richard said:


> It's the only logical solution to the problem you stated. Also the fact that people are so often buying on the way up should be a good proof that delaying is a bad idea. It's the opposite of what you would want to do.


I'm not following you. Perhaps if you reiterated the problem as you think I stated it, I could follow you. I suspect you are assuming that only one etf is permitted. No one is restricted to just one etf, as far as I know. Supposing one is using XIU, Spy, and etf for Brazil, and another for Europe, and so on. Then there are likely multiple buying opportunities.


----------



## cjk2 (Sep 19, 2012)

That's a neat idea, but my gut reaction is that it won't work. Admittedly, I don't really have anything specific to back that up, so I'd definitely be interested in back-testing it and let the numbers do the talking.

Just a question: while you suspended purchases, you're racking up a lot of cash. So when you start buying again, how much of the cash will you use towards each purchase? e.g. let's say you usually add $1000 each period, then according to the rules stopped buying for 5 periods so you're now sitting on $5k cash. The next time the index falls below the 270-day-MA, you have $6k cash on hand. Would you go out and spend all the $6k at once? Or DCA it over the next, say, 5 periods? And if you DCA it, what happens if the index again jumps above the MA? Potentially you could be continually delaying purchases and racking up cash without spending it.

Or are you saying, you would put all the cash towards a different ETF/index during that time period, because you are assuming there will always be one index below its MA?


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> That's a neat idea, but my gut reaction is that it won't work. Admittedly, I don't really have anything specific to back that up, so I'd definitely be interested in back-testing it and let the numbers do the talking.
> 
> Just a question: while you suspended purchases, you're racking up a lot of cash. So when you start buying again, how much of the cash will you use towards each purchase? e.g. let's say you usually add $1000 each period, then according to the rules stopped buying for 5 periods so you're now sitting on $5k cash. The next time the index falls below the 270-day-MA, you have $6k cash on hand. Would you go out and spend all the $6k at once? Or DCA it over the next, say, 5 periods? And if you DCA it, what happens if the index again jumps above the MA? Potentially you could be continually delaying purchases and racking up cash without spending it.
> 
> Or are you saying, you would put all the cash towards a different ETF/index during that time period, because you are assuming there will always be one index below its MA?


Your questions are good. If the principle of DCA - to buy more shares when prices are lower, and less when prices are higher - is on the right path, it seemed it could be enhanced without making it too complicated. However, as many have suggested, it should be tested, as some times what looks good, isn't actually. 
To answer your question, once one is in a suspend purchases situation with a particular etf, look to another etf that is in buy territory - US, Europe, Brazil come to mind as possibilities. That way, one who dislikes holding cash, will likely find a place to put it. 

The weakness I see in my proposal is as the market crashes below the ma EG 2008, it that to start buying right away is too early, and later as it crosses above the ma (EG Muly 2009) , the beginning of a new bull, suspending buying seems too soon. 

I fear that attempting to enhance DCA may make it too complicated because now, I'm in a situation where another rule is maybe relevant to postpone buying after the index crashes below the ma, and postponing the buying suspension after the index crosses above the ma.


----------



## cjk2 (Sep 19, 2012)

I did some preliminary tests. Since I already had the data for the TD e-series US Index downloaded, I used that. I assumed a contribution of $100 every 2 weeks, with dividends reinvested, from Oct. 10, 2000 to Feb. 28, 2014. First investment date for all cases is Sep. 11, 2001 (i.e. 270 days after Oct. 10, 2000).

*Results: *(Note: results were updated Mar. 6 to make source data consistent with later tests.)

No checking for MA: 63.2% gain (invested $32.2k, total at end=$52561.22)
50-day MA: 70.3% gain (invested $12.9k, total at end=$21974.92)
100-day MA: 72.9% gain (invested $12.8k, total at end=$22136.88)
200-day MA: 73.2% gain (invested $14.4k, total at end=$24947.08)
270-day MA: 73.2% gain (invested $14.2k, total at end=$24592.76)

It does seem that checking for MA results in increased gains; however, I'm not sure the differences are statistically significant. Also, whether or not you'd actually be further ahead depends on what you do with the money during the weeks where you don't contribute. *When checking for MA, the total amount invested is less than half what you would've put in if you had just invested regularly. So you'd still be WAY behind if that money languished as cash or in another investment with lower returns.*

I might download the data for the TD Canadian Index and TD International Index as well, to see what a portfolio might look like with this strategy in place. (Note: I'm using the TD e-series because that's where I've invested my money so far, so I'm curious how your strategy would affect my past results. I'm open to running the tests on other indexes or ETFs though.)

As a follow-up question then, what would you do if _all _indexes were above their moving averages? Would you simply keep the cash? Once again you'd run into the problem of missing out on gains simply because your money isn't in the market. I feel like maybe you should add a rule outlining how to spend the excess accumulated cash.

(As an aside, in your first post I'm confused why you refer to the 270-day moving average as 54 weeks? I must be missing something here because 270 days = 39 weeks....right?)


----------



## GoldStone (Mar 6, 2011)

Pluto, you are trying to solve the problem that has already been solved.

The solution: diversification and rebalancing.

Put together a portfolio of a few asset classes. Something like: 25% bonds, 25% Canada, 25% US, 25% International. Or 40/20/20/20 when you are older.

Split your monthly purchases in the same proportion: 25/25/25/25 or 40/20/20/20.

If one of the asset classes runs away, stop buying it. Redirect new money to the asset class that is currently below its target weight.

Simple and effective. No need to monitor SMAs. No need to reinvent the wheel.


----------



## cjk2 (Sep 19, 2012)

^ that's a really good point--rebalancing should take care of that. Somehow I'd forgotten about it!

Pluto, I think if you want to test out the moving average strategy, you'd need additional rules. If I'm understanding correctly, you're trying to hold back on putting in too much $ when the costs are high, and instead waiting to invest the money when the costs drop, thus reducing the average cost. But again, that brings up the question of how will you decide to invest all that saved money when costs drop again...


----------



## cainvest (May 1, 2013)

GoldStone said:


> Split your monthly purchases in the same proportion: 25/25/25/25 or 40/20/20/20.
> 
> If one of the asset classes runs away, stop buying it. Redirect new money to the asset class that is currently below its target weight.


So would it make a difference for those doing monthly purchases to keep their allocation, say 40/20/20/20, and then only rebalance once a year?


----------



## GoldStone (Mar 6, 2011)

cainvest said:


> So would it make a difference for those doing monthly purchases to keep their allocation, say 40/20/20/20, and then only rebalance once a year?


No it wouldn't. Annual rebalancing is good enough. Yes, there are studies about that. 

Do whatever is cheaper and more convenient.


----------



## richard (Jun 20, 2013)

cjk2 said:


> No checking for MA: 57.9% gain (invested 37.3k, total at end=$58,879.76)
> 50-day MA: 62.3% gain (invested 16.1k, total at end=$26,128.52)
> 100-day MA: 63.9% gain (invested 16.k, total at end=$26,549.93)
> 200-day MA: 66.3% gain (invested 17.3k, total at end=$28,770.80)
> 270-day MA: 67.3% gain (invested 16.9k, total at end=$28,276.57)


With the 270-day MA you have $30k less in final portfolio value but $20k more in cash, so the net missed opportunity is $10k or 27% of the investable amount. That doesn't sound like a winning strategy but then again a single time period doesn't tell you much.


----------



## cjk2 (Sep 19, 2012)

cainvest said:


> So would it make a difference for those doing monthly purchases to keep their allocation, say 40/20/20/20, and then only rebalance once a year?


I actually ran a bunch of tests when I first started investing to determine what the best rebalancing strategy is (yes, I'm a bit of a geek that way!). Even though the differences weren't huge, rebalancing too frequently definitely lowered returns (because you basically end up buying less of what's actually performing well at the moment).

So yes, like GoldStone mentioned, only rebalance every year. Any more often is actually detrimental. In fact, even rebalancing every 2 years is fine. My personal approach is to rebalance when a certain threshold is reached (e.g. an index increases or decreases by more than 20% of it's allocation). This seemed to give the best results (although the tiny advantage over simply rebalancing every 1-2 years is not worth the hassle and may not even be statistically significant; personally, I do enjoy checking my investments every time I add new money so it's not any added work for me, but there's definitely no need to do so if you just like to add money automatically periodically without worrying about the numbers).

So far, I haven't rebalanced my portfolio a single time yet...although I expect one might be coming up soon (with the threshold rebalancing, it seemed to average 1 rebalancing every 2 years, which I'm almost at).


----------



## cjk2 (Sep 19, 2012)

richard said:


> With the 270-day MA you have $30k less in final portfolio value but $20k more in cash, so the net missed opportunity is $10k or 27% of the investable amount. That doesn't sound like a winning strategy but then again a single time period doesn't tell you much.


Yes, I think that's the key part...There needs to be more to this strategy because currently there's a big part missing (aka, what you would do with the saved cash).


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> I did some preliminary tests. Since I already had the data for the TD e-series US Index downloaded, I used that. Data was available from Nov. 26, 1999 to present. I assumed a contribution of $100 every 2 weeks, with dividends reinvested. Results:
> 
> No checking for MA: 57.9% gain (invested 37.3k, total at end=$58,879.76)
> 50-day MA: 62.3% gain (invested 16.1k, total at end=$26,128.52)
> ...


I'm glad you did some testing. 
1. 54 week vs 270 day ma question: the market is usually open 5 days per week. so 5 x 54 = 270. So 270 days is an approximation of a 54 week ma. 
2. In testing the 270 crossover strategy: In the event you have some cash saved when your fund crosses below the ma, you should increase your $ amount of purchases. EG. Normally $100 every two weeks. But you saved cash during the suspend buy period, then index drops below. At that point you should, depending on how much cash you have, increase the amount invested each two weeks. Then when the index moves above the ma, invest all available cash at that time. I don't know if you tested for that, or if you stuck with your 100 each 2 weeks when index was below the ma. For instance, any cash you accumulated between 1999 and say 2003 should be invested by the time the index moved above the ma in, I assume, 2003. Similarily with the 2008-9 period: any cash remaining should be invested before or at the cross above the ma in 2009. 
3. if all indexes were above the ma, a conservative thing to do with is to buy short bond etf, and hold until a stock buying opportunity came along. 

It is interesting that in your test, using the ma the gain was 67% vs 57% for the no ma. But then as you note, using the ma you only had invested $16.9 k vs $37.3K for the no ma test. That's why I am wondering if, when testing for the ma strategy, did you make sure all cash was invested at or before the cross above?


----------



## Pluto (Sep 12, 2013)

GoldStone said:


> Pluto, you are trying to solve the problem that has already been solved.
> 
> The solution: diversification and rebalancing.
> 
> ...


As previously stated, I am not competing with an asset allocation strategy. 
Apparently there are folks who use DCA to invest in equity index etf's. My proposal is to enhance what they already do. Your approach is to tell them to asset allocate. I get your point. But what if they don't want to be 25% invested in bonds all the time? What if they want to be invested in stocks at the lowest possible cost? And what if they don't have enough money to allocate assets? What if they are age 25 and investing $100 every two weeks? and plan to do that? I'm aware that you allocate your assets. I am aware that you prefer it. But presently, I am addressing those who already DCA relatively small amounts in index funds. What would stop you from starting a thread on the asset allocation model? This thread is about how to enhance DCA, not asset allocation.


----------



## GoldStone (Mar 6, 2011)

Pluto said:


> But what if they don't want to be 25% invested in bonds all the time? What if they want to be invested in stocks at the lowest possible cost? And what if they don't have enough money to allocate assets? What if they are age 25 and investing $100 every two weeks? and plan to do that?


If they are age 25 and invest $100 every two weeks, this entire thread is just white noise.

In the long run, it does not matter one bit how they invest their bi-weekly $100. Below SMA or above SMA - does not matter at all. The important part is to save and invest, to diversify and to keep the costs low. Their career path and saving habits will have a dramatically bigger impact on their eventual Net Worth. 

Oh, and by the way, you can allocate assets and rebalance with as little as $500. Look up the investment minimums on the e-series funds.



Pluto said:


> This thread is about how to enhance DCA, not asset allocation.


Are you saying that I am not allowed to criticize your idea or mention the alternatives?


----------



## richard (Jun 20, 2013)

If they don't have enough money to do asset allocation they should buy ING streetwise funds. At that point MERs (and returns) don't matter.


----------



## cjk2 (Sep 19, 2012)

Pluto said:


> 1. 54 week vs 270 day ma question: the market is usually open 5 days per week. so 5 x 54 = 270. So 270 days is an approximation of a 54 week ma.


Of course, can't believe I didn't think about that. I'm curious, you mentioned that you picked this MA due to research...could you possibly elaborate on that research?



> It is interesting that in your test, using the ma the gain was 67% vs 57% for the no ma. But then as you note, using the ma you only had invested $16.9 k vs $37.3K for the no ma test. That's why I am wondering if, when testing for the ma strategy, did you make sure all cash was invested at or before the cross above?


No, those tests were based on the very simple rules of buy when price < MA, hold when price > MA. Based on your new rules: let's say I suspended buying for 5 periods, therefore I now have $500 cash on hand when the price drops < MA. Would you be proposing increasing the amount to, say, $200 per period (instead of $100) until I use up the extra $500? Or, if the price once again > MA at week 3, I would spend the entire $300 at this point.

This makes the scenario more interesting. I'll backtest the data and get back to you on it.


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> Of course, can't believe I didn't think about that. I'm curious, you mentioned that you picked this MA due to research...could you possibly elaborate on that research?
> 
> 
> No, those tests were based on the very simple rules of buy when price < MA, hold when price > MA. Based on your new rules: let's say I suspended buying for 5 periods, therefore I now have $500 cash on hand when the price drops < MA. Would you be proposing increasing the amount to, say, $200 per period (instead of $100) until I use up the extra $500? Or, if the price once again > MA at week 3, I would spend the entire $300 at this point.
> ...


1. The research was described in The Encyclopedia of technical market indicators, by Colby & Meyers. 1st edition. They have a 2nd edition which I have not read. Their testing concluded that a 54 week ma was optimal for buy and sell signals for lump sum investing as follows: buy when the market crosses above the 54 ma, sell and sell short when the market crosses below the 54 ma. However, their approach is not designed for those who DCA with relatively small amounts. So I took their optimal 54 week ma as a starting point to see if DCA could be enhanced using it. 

2. Yes to your other question. When you have cash increase the $ amount of purchases when it drops below the ma in order to use up all cash. For this idea, upon crossing above the ma in 2003 and 2009, you should have zero cash left. So if you increased it to say 200 per period when below the ma, but had, say $1000.00 left at the time of crossing above the ma, you should invest the entire 1000.00 at that time.


----------



## cainvest (May 1, 2013)

cjk2 said:


> No checking for MA: 57.9% gain (invested 37.3k, total at end=$58,879.76)
> 50-day MA: 62.3% gain (invested 16.1k, total at end=$26,128.52)
> 100-day MA: 63.9% gain (invested 16.k, total at end=$26,549.93)
> 200-day MA: 66.3% gain (invested 17.3k, total at end=$28,770.80)
> 270-day MA: 67.3% gain (invested 16.9k, total at end=$28,276.57)


So what would the gains be when all the cash is taken into account? 

Of course this assumes that the "cash" side (what's waiting to be invested) needs to be accessible to buy at any given time.


----------



## GoldStone (Mar 6, 2011)

I missed this:



cjk2 said:


> I did some preliminary tests. Since I already had the data for the TD e-series US Index downloaded, I used that. Data was available from Nov. 26, 1999 to present. I assumed a contribution of $100 every 2 weeks, with dividends reinvested. Results:
> 
> No checking for MA: 57.9% gain (invested 37.3k, total at end=$58,879.76)
> 50-day MA: 62.3% gain (invested 16.1k, total at end=$26,128.52)
> ...


No, you cannot claim that. This is not a valid comparison. 

As others have pointed out already, you have to compare total portfolio returns, including uninvested cash.


----------



## cjk2 (Sep 19, 2012)

GoldStone said:


> I missed this:
> 
> 
> No, you cannot claim that. This is not a valid comparison.
> ...


Ummm...actually I pointed that out myself in the very next sentence (that overall, including uninvested cash, it actually works out to be worse). I didn't say it resulted in increased *total *gains. Perhaps I didn't word it quite right, but it's not fair to only quote part of my post.


----------



## cjk2 (Sep 19, 2012)

Pluto, here's the backtested data. (Note: I realized in the previous calculations, I made an error: the 270-MA method entered the market starting day 271, but the 200-day MA method entered on day 201, etc. and with no tracking of MA entered on day 1. Which of course is not quite comparing the same thing. I've gone back and fixed that so that all cases enter the market on day 270.)

Again, this is using the TD e-series US Index, and assumes investing $100 every 2 weeks, dividends reinvested, and any held cash grows at 1.25% (aka the interest rate for the TD Investment Savings Account). I've added more detail into the results since the way I displayed the previous results was misleading. (Note: results were updated Mar. 6 to make source data consistent with later tests.)

*No MA: * $32200 invested grows to $52561.22 with $0 cash held at the end = 63.2% gain. Overall portfolio: $32.2k grows to $52561.22 = 63.2%

*50-day MA: *$30954.54 invested grows to $51070.77 with $1303.75 cash held at the end = 65% gain. Overall portfolio: $32.2k grows to $52374.52 = 62.7%

*100-day MA: *$28875.69 invested grows to $48551.10 with $3427.04 cash held at the end = 68.1% gain. Overall portfolio: $32.2k grows to $51978.14 = 61.4%

*200-day MA: *$26383 invested grows to $44990.40 with $5982.79 cash held at the end = 70.5% gain. Overall portfolio: $32.2k grows to $50973.19 = 58.3%

*270-day MA: *$26373.19 invested grows to $45190.87 with $5982.79 cash held at the end = 71.4% gain. Overall portfolio: $32.2k grows to $51173.66 = 58.9%


*Summary: *it seems that using the MA strategy does increase returns _for the portion of the money invested into the market_; however, because you are out of the market for substantial periods of time, your overall portfolio actually does worse.

Of course, the results are probably highly dependent on which time period is tested. Still, it shows that this strategy definitely isn't reliable. (Note that because the US Index has been on an extended bull run in recent years, for both the 200 and 270-day MA nothing was invested after Dec-8-2011. That results in nearly $6k cash held at the end which missed out on the recent gains.)


----------



## cainvest (May 1, 2013)

Much better cjk2, easy to compare the total differences now. If you're interested in these models try the Faber model on the same data and see what you get.


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> *Summary: *it seems that using the MA strategy does increase returns _for the portion of the money invested into the market_; however, because you are out of the market for substantial periods of time, your overall portfolio actually does worse.
> 
> Of course, the results are probably highly dependent on which time period is tested. Still, it shows that this strategy definitely isn't reliable. (Note that because the US Index has been on an extended bull run in recent years, for both the 200 and 270-day MA nothing was invested after Dec-8-2011. That results in nearly $6k cash held at the end which missed out on the recent gains.)


Thank you for testing that. I hope you save your work and re check it as time passes. Too, I'd like to mention that the proposal was not meant to confine one to only one etf. If one was investing in a TSX index etf eg. xiu, and a US ETF, EG SPY, there would be more buying opportunities with out saving so much cash. 
You have an open mind, and you are willing to check for possible alternatives. Thanks again.


----------



## cjk2 (Sep 19, 2012)

^ Yes, I've actually just downloaded the data for the TD e-series Canadian Index & International Index, it'd be interesting to see if the results change at all with a portfolio of the 3 indexes together. I'll keep you posted on the results. 



cainvest said:


> Much better cjk2, easy to compare the total differences now. If you're interested in these models try the Faber model on the same data and see what you get.


Sorry, I'm not very knowledgeable about the different investment strategies (I just go with a passive portfolio with no market timing, although I find it really interesting to test them out). Could you elaborate on the Faber model? I'd like to compare them for sure.


----------



## cainvest (May 1, 2013)

cjk2 said:


> Could you elaborate on the Faber model? I'd like to compare them for sure.


Here you go,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461


----------



## Pluto (Sep 12, 2013)

I like the Faber article. thanks for posting the link to it. 

Further thoughts on how to enhance DCAing:

If I was DCAing, I would get a margin account at my earliest convenience. Then when the index I am buying crossed from below the 270 ma, I would buy more on margin. (hopefully the index paid a dividend, as then the interest expense would be deductible.) The reason for picking that time, ie the cross from below to above, is that it is a fairly reliable indication of a new bull market. Then my regular savings could go to paying down the margin. The advantage is obvious: one is investing into a strong market using other peoples money, and getting a tax deduction too. 

Some other thoughts: Looking at the original chart I posted which compares the index price and the 270 day ma, during down markets you will see that there are times when the distance of the price below the ma is greatest. The increasing distance of the price below the ma is an approximate measure of increasing fear and pessimism. Be greedy with others are fearful ( especially when one is buying an index fund, and not some fly by night xyz sliver mine that might not have any silver). 
Too, on the upside, that is, when the price above the ma gets greater in distance, that is an approximate measure of increasing optimism, greed, and possibly delusional euphoria. If I was DCAing, and on margin, and the price got unusually high above the ma, I'd probably sell enough to get off margin. Be fearful when others are greedy.

And a final thought, since my original proposal did not really enhance DCAing according to the math, there are quite possibly other simple tweaks that could enhance it. It isn't impossible that with further contributions from the open minded that this thread could eventually arrive at an enhanced strategy.


----------



## cjk2 (Sep 19, 2012)

cainvest said:


> Here you go,
> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461


Good read! I'm going to test that strategy out next. Interesting that the Faber model seems to be the opposite of Pluto's strategy? (They are buying when price > MA, rather than when price < MA.)

Anyhow, I've run the tests for a portfolio of TD e-series US, Canadian, and International Index. Unfortunately, there's still a decreased return when checking for moving average, vs. simply adding the money at regular intervals: 55.5% with 270-day MA, vs. 57.6% when not checking for MA. (Note: because the first data point for the TD International Index isn't until Oct. 10, 2000, I had to push back the start date for the tests. As such I've also gone back to my previous 2 posts and updated the data so that the dates are consistent.)

*Results: *

Assume a contribution of $100 every 2 weeks, split evenly between each index, with dividends reinvested, from Oct. 10, 2000 to Feb. 28, 2014. First investment date for all cases is Sep. 11, 2001, i.e. 270 days after Oct. 10, 2000. Money is only invested in indexes where price < MA (e.g. if US Index > its moving average, $50 will be put into the Canadian/International indexes instead of $33.33 per index). If all indexes > their moving average, money is held until one fund drops below MA. Held cash grows at an interest rate of 1.25%.

*No MA check: *overall 57.6% (32.2k -> 50.7k. 0 cash held at end). US 63.2% (10.7k -> 17.5k), CDN 63.4% (10.7k -> 17.5k), INTL 46.2% (10.7k -> 15.7k).

*270-day MA: *overall 55.5% (32.2k -> 50k. 1.7k cash held at end). US 67.1% (13.4k -> 22.4k), CDN 51.8% (7.2k -> 11k), INTL 50.6% (10k -> 15k).

I didn't include tests for 50, 100, 200-day MAs because I don't think they really add anything to the results--there were small variations but nothing big, and none of them got better results than no MA checking. As would be expected, when checking for MAs, the asset allocations quickly became way out of whack. I also found it interesting that for the CDN Index, using the MA strategy led to _much_ worse results (whereas for the others, the individual funds did show high gains for the portion of money invested into the market). I took a closer look by graphing the data; it turns out that from Jun. 2003 to Aug. 2007, the index was generally above the MA so you end up losing out on all the gains on the way up. Then the price levels out, finally dropping below the MA at the beginning of 2008, so a large amount of money is dumped into the fund...just in time for the huge crash in 2008. So yeah, overall, terrible timing.


----------



## GoldStone (Mar 6, 2011)

cjk2 said:


> Good read! I'm going to test that strategy out next. Interesting that the Faber model seems to be the opposite of Pluto's strategy?


I said as much in post #18. 

And here's a link from post #20. It's a thorough retest of Faber's strategy by a 3rd party. 

http://gestaltu.com/2014/02/faber-ivy-portfolio-as-simple-as-possible-but-no-simpler.html


----------



## cjk2 (Sep 19, 2012)

^ Thanks for the links! With all the backtested data available, the Faber model does seem more promising...although, personally, I've always been rather leery of market timing strategies. Do you happen to have a link to the original thread discussing the article? I'd be interested to read it.




Pluto said:


> Some other thoughts: Looking at the original chart I posted which compares the index price and the 270 day ma, during down markets you will see that there are times when the distance of the price below the ma is greatest. The increasing distance of the price below the ma is an approximate measure of increasing fear and pessimism. Be greedy with others are fearful ( especially when one is buying an index fund, and not some fly by night xyz sliver mine that might not have any silver).
> Too, on the upside, that is, when the price above the ma gets greater in distance, that is an approximate measure of increasing optimism, greed, and possibly delusional euphoria. If I was DCAing, and on margin, and the price got unusually high above the ma, I'd probably sell enough to get off margin. Be fearful when others are greedy.


I think this is sufficiently different from your initial MA strategy that it could be interesting to explore, because it sounds closer to the simple "buy-and-hold" strategy, except you might increase/decrease the amount invested based on the price in relation to MA. If you come up with rules to implement this, I would definitely be open to testing it. Just because one method didn't work out, doesn't mean another one won't.

Anyways, I think I'm done with the tests on your original MA strategy for now, but just one last addition (because I found the Canadian Index interesting): it seems that the more dramatic the gains are when you look at just the portion invested, the more dramatic the loss when you look at the entire portfolio. E.g. with the Canadian Index, if you were only to buy when price < 270-day MA and hold when price > MA, you'd see a gain of 90% on the money in the market! (vs. 63% for regular buy-and-hold.) *However, *this only came from the $9.9k invested in the market (out of a potential $32.2k). (Compare with the US Index from before, where the apparent "gains" were much smaller but the overall loss also smaller.) In both cases, though, you'd be way further ahead by simply investing regularly in the index.

In the first post you stated: "Intuitively, one can see that their average cost is going to be much lower compared to the standard DCA rules. By using this strategy you will automatically begin to out perform the index you are buying."

Well, this is indeed true..._but ONLY if you're looking at just the money you actually invest into the market_. However, I think that by only buying the index when it is at "great value", you miss out on a lot of times when it is still at "good value". So even though it might stop you from buying at "terrible value", overall it's still not worth it.


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> I think this is sufficiently different from your initial MA strategy that it could be interesting to explore, because it sounds closer to the simple "buy-and-hold" strategy, except you might increase/decrease the amount invested based on the price in relation to MA. If you come up with rules to implement this, I would definitely be open to testing it. Just because one method didn't work out, doesn't mean another one won't.
> 
> Anyways, I think I'm done with the tests on your original MA strategy for now, but just one last addition (because I found the Canadian Index interesting): it seems that the more dramatic the gains are when you look at just the portion invested, the more dramatic the loss when you look at the entire portfolio. E.g. with the Canadian Index, if you were only to buy when price < 270-day MA and hold when price > MA, you'd see a gain of 90% on the money in the market! (vs. 63% for regular buy-and-hold.) *However, *this only came from the $9.9k invested in the market (out of a potential $32.2k). (Compare with the US Index from before, where the apparent "gains" were much smaller but the overall loss also smaller.) In both cases, though, you'd be way further ahead by simply investing regularly in the index.
> 
> ...


The rules are simple. 

DCA as usual, that is, using your example: -

1. buy $100.00 the e-series fund every two weeks. 

2. If the fund drops below the 270 day ma, and drops more than 20% from it's recent peak, when it turns up and crosses above the 270ma, buy more on margin. How much? Its a judgment call. But for sake of illustration, 50% more. EG. Divide the value of your holding by 2 and buy that amount on margin. 
3. Continue adding $100.00 every two weeks. 
4. If the market cap of the Wilshire Total market exceeds US GNP, and you are still on margin, sell enough units to get off margin. 

That should work, and it might even be testable. 

On a slightly different angle, not about DCAing, I realize market timing is not popular with many folks, and that's their prerogative. I engage in market timing myself via the following rules: -

1. On the sell side: If the Wilshire total Market value exceeds US GNP, and the S&P 500 crosses from above to below the 270 day ma, sell.
2. On the buy side: When the S&P 500 crosses from below to above the 270 day ma, buy. 
3. Optional actions: a) upon a buy signal, buy on margin. b) after a sell signal, and before the buy signal buy some when the distance between the 270 ma, and the price below the ma appears to be greatest. The latter option is a bit subjective and possibly not testable. It also assumes one is buying quality. One of the criteria for quality is proven survivability in the past. 

Comment: Many folks shy away from great buying opportunities such as the last on in 2008 -9 based on the assumption that it is too risky. Such times are actually the safest. Too, it is very safe to buy on margin at the buy signal, as defined in rule 2. (Again the assumption is one is buying quality.) 

Thanks for your input.


----------



## cjk2 (Sep 19, 2012)

^ Interesting. I will look into it.



cainvest said:


> If you're interested in these models try the Faber model on the same data and see what you get.


I've run the tests for the Faber model, varying the investment interval and moving average. There was no pattern to the results--some index funds performed better with the strategy vs. regular DCA with some moving averages; other funds with other moving averages performed worse. As an example, investing every 28 days and using a 200-day MA (an approximation of the Faber model which checks for 10-month MA every month) results in a return of 55.2% for the e-series International Index, vs. only 46.3% if doing regular DCA. But, with the same rules in place, over the same time period you'd only get 56.4% return from the e-series US Index vs. 63.2% with regular DCA. In other words, the strategy isn't reliable if you're aiming to use it for increased returns. (With a portfolio of all 3 e-series funds, the return was 56.8% for Faber model vs. 57.8% for regular DCA--can't really conclude much from that.) And just by changing the investment interval to every 30 days, or using a 270-day MA, there were huge differences in results (in some cases the Faber model outperforms regular DCA by a wide margin, in other cases it's the opposite). Really, this is probably expected with a market-timing strategy--it's highly dependent on the data used.

However: the one _major _benefit with the Faber strategy was _much _lower volatility, as you manage to get out of the market before the major crashes. So if that's what you're aiming for, the strategy certainly seems to deliver.

My conclusion is that the extra work involved with market timing is really not worth it for me, considering the returns could be either lower or higher. I'll stick to my passive investing strategy, because I still have many years to go until retirement and I think I can handle seeing my portfolio crash (that may change when it actually occurs, of course!). _However, _if I had lower risk tolerance, or was getting close to retirement and didn't want to see my portfolio drop a ton in value during a crash, the Faber strategy seems to be a great way to reduce risk.


----------



## cainvest (May 1, 2013)

As posted in the paper, increasing the MA duration does increase annualized returns without really changing the maximum drawdown. The other benefit of using longer MA is you'll likely have less trading and/or reduced time "out of market". It does appear to favor long term investing, 108 year S&P500 data shows a 1.2% increase in annualized return and shorter time windows may not produce an increase and of course there is no gaurantee for the future returns.


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> ^ Interesting. I will look into it.
> 
> My conclusion is that the extra work involved with market timing is really not worth it for me, considering the returns could be either lower or higher. I'll stick to my passive investing strategy, because I still have many years to go until retirement and I think I can handle seeing my portfolio crash (that may change when it actually occurs, of course!). _However, _if I had lower risk tolerance, or was getting close to retirement and didn't want to see my portfolio drop a ton in value during a crash, the Faber strategy seems to be a great way to reduce risk.


I see your point: It seems that enhancing DCA is way too complicated. It possibly may never be improved upon, but testing ideas is part of one doing their own due diligence. 
I think you might find the model I use interesting even if you don't employ it. IE,

1. On the sell side: If the Wilshire total Market value exceeds US GNP, and the S&P 500 crosses from above to below the 270 day ma, sell.
2. On the buy side: When the S&P 500 crosses from below to above the 270 day ma, buy. 
3. Optional actions: a) upon a buy signal, buy on margin. b) after a sell signal, and before the buy signal buy some when the distance between the 270 ma, and the price below the ma appears to be greatest. The latter option is a bit subjective and possibly not testable. It also assumes one is buying quality. One of the criteria for quality is proven survivability in the past. 

The 54 week/270 day was the preferred method of Colby/Meyers. Sell when it crosses below, and buy when it crosses above. But it triggered a few sells, and buys in a bull market, and the whipsaws were annoying. Plus it has no eye for value/over valued. So I added the Wilshire Total value to US GNP filter. (Can use GDP too). Now the system doesn't trigger a sell signal unless the market is over valued by that measure. Plus the index has to fall below the 270 ma, so one does not automatically get out of an over valued market that could go on for a couple of years. 

And you are right: people near retirement or in retirement get very discouraged at sudden sharp losses. A lot of Canadians invest in the Canadian banks, so just as an example, TD fell about 50% in the 2000 - 2003 era, and approximately 65% in the 2008 -9. Many felt wiped out and that they couldn't retire. Many people, young and old, can get really discouraged, and out of fear sell at the bottom. By following the three simple rules, they can feel in control of the market, instead of it controlling them. 
Presently, we are in over valued territory according to the rule cited. My opinion is the next time the market drops below the 270 day ma (assuming it is still over valued) will be the big one. If the market were rational, it would go more or less sideways until earnings caught up to prices, then the over valuation would be addressed with out a crash. Then dropping below the ma, would not be a sell signal. What I suspect will happen, however, is investors will use the improving US economy as a rationalization. They will incorrectly assume that an improving economy will keep stock prices afloat. Already I see many claims in articles linking higher stock prices to improving jobs numbers. People will think that if employment gets to a normal range, that is good for the market. It is really the opposite. Over valued market, low unemployment is bad for the market. 

Beware Pluto's sell signal: Over valued market + cross below 270/54 week ma. I think it is the best sell signal. It has possibly never been wrong.


----------



## OptsyEagle (Nov 29, 2009)

I didn't read all 7 pages of this thread but just so you know, DCA does very little to improve ones wealth. it really is a myth. Don't get me wrong, I agree it can create a higher rate of return then what is produced by the underlying investment, but it does it on very little money invested. 

You see, when one starts out DCA let say $100 per month, it will create a better return over the next 3 or 4 years, on those contributions, then what the return on the underlying investment is, however, it is a greater return on a very small amount. In my example, a few thousand dollars. As your investment account grows, let's say to $50,000 or more, the overriding results the investor will have, in any given year, will obviously come from the return on the large amount of money that was invested, before the year started, not the $1200 that is added over the next 12 months of that year, via DCA.

So, in summary, DCA may look like a sort of miracle of math, but in reality, it does very little good for the investor. At least a lot less then is professed by the investing community.

That's my opinion, anyway.


----------



## olivaw (Nov 21, 2010)

OptsyEagle, savings tend to increase dramatically with age. Somebody who invested $1,200 per year at the age of 25 is probably investing $6,000 per year at the age of 40 and $12,000 per year (or more) at the age of 55. Investments later in life have a meaningful impact because they are larger.


----------



## Pluto (Sep 12, 2013)

OptsyEagle said:


> I didn't read all 7 pages of this thread but just so you know, DCA does very little to improve ones wealth. it really is a myth. Don't get me wrong, I agree it can create a higher rate of return then what is produced by the underlying investment, but it does it on very little money invested.
> 
> You see, when one starts out DCA let say $100 per month, it will create a better return over the next 3 or 4 years, on those contributions, then what the return on the underlying investment is, however, it is a greater return on a very small amount. In my example, a few thousand dollars. As your investment account grows, let's say to $50,000 or more, the overriding results the investor will have, in any given year, will obviously come from the return on the large amount of money that was invested, before the year started, not the $1200 that is added over the next 12 months of that year, via DCA.
> 
> ...


Yes, I see your point. I suppose it is possible that as time goes by the saver investor might have increase in income, and then save more. What started out as 100 per period, could end up being 1000, and then 1500. 
Anyway, so far I have struck out in enhancing it. Maybe I'll try one more time.


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> My conclusion is that the extra work involved with market timing is really not worth it for me, considering the returns could be either lower or higher. I'll stick to my passive investing strategy, because I still have many years to go until retirement and I think I can handle seeing my portfolio crash (that may change when it actually occurs, of course!). _However, _if I had lower risk tolerance, or was getting close to retirement and didn't want to see my portfolio drop a ton in value during a crash, the Faber strategy seems to be a great way to reduce risk.


I'll take one more kick at the can, if you are interested. 

1. DCA using your example of 100.00 every two weeks.
2. Sell everything upon the sell signal, which is, When the value of the Wilshire total market is > US GDP, and the S&P drops below the 270 ma sell. 
3. Buy back when the S&P crosses above the 270 ma and continue with normal DCA.

A graph showing when the Wilshire market cap is > than US gdp is attached.


----------



## cjk2 (Sep 19, 2012)

^ This would only be for the US Index then, right? Is there an equivalent for the Canadian Index?



cainvest said:


> As posted in the paper, increasing the MA duration does increase annualized returns without really changing the maximum drawdown. The other benefit of using longer MA is you'll likely have less trading and/or reduced time "out of market". It does appear to favor long term investing, 108 year S&P500 data shows a 1.2% increase in annualized return and shorter time windows may not produce an increase and of course there is no gaurantee for the future returns.


I didn't find a clear correlation between increased MA duration and increased returns. The results also varied greatly just by changing the investment interval by 1 day. All in all, I don't find it to be a reliable method of increasing returns, only of reducing risk. (Although, perhaps it's true that it would perform better over longer periods of time--I didn't really test that.)


----------



## cainvest (May 1, 2013)

cjk2 said:


> All in all, I don't find it to be a reliable method of increasing returns, only of reducing risk. (Although, perhaps it's true that it would perform better over longer periods of time--I didn't really test that.)


Over a very long period it does show a slight gain but there are a number of decades that showed losses. Many people/businesses have worked on models to "beat the market", and all have failed, well ... that I know of anyways.


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> ^ This would only be for the US Index then, right? Is there an equivalent for the Canadian Index?


You can use a Canadian index. Our economy is very much intertwined with the US. So I assume that if their Total market is over valued, ours is too. I also assume that if their market tanks, ours will as well. So use any US or Canadian index fund.


----------



## andrewf (Mar 1, 2010)

No, that doesn't follow. Canada's sector mix is quite different than the US market's.


----------



## Pluto (Sep 12, 2013)

andrewf said:


> No, that doesn't follow. Canada's sector mix is quite different than the US market's.


Regardless of the sector mix, every time th US indexes crash, so does the TSX going back to the 1980's. So I am sticking to my assumption.


----------



## cjk2 (Sep 19, 2012)

Pluto: sorry, I was too busy last week to run the tests on your strategy, but I am still interested. I just downloaded the US GDP for the past 14 years, however where do you get the data for the Wilshire Total Market? I can only find data for the Wilshire Index...could you point me in the right direction?



cainvest said:


> As posted in the paper, increasing the MA duration does increase annualized returns without really changing the maximum drawdown. The other benefit of using longer MA is you'll likely have less trading and/or reduced time "out of market". It does appear to favor long term investing, 108 year S&P500 data shows a 1.2% increase in annualized return and shorter time windows may not produce an increase and of course there is no gaurantee for the future returns.


cainvest: I forgot to mention, from what I read in the Faber article, it seems that they were testing "buy-and-hold". i.e. a lump sum investment at the beginning, and then compared it over time. Is this correct? My tests before were comparing a DCA strategy, adding the same amount of money every period. When I tested for an initial lump sum investment, the Faber model did indeed come out the winner in almost every case (with the exception of a 50-day moving average, which is probably too short).

From this, I've decided that it's a great model to use when I'm retired and stop adding money every 2 weeks. At that point, using the Faber model drastically reduces volatility and also increases returns. When I graphed it, the Faber strategy still lagged behind when the market is rising rapidly, but comes away huge when the market crashes. When DCA-ing, you are able to (in later years) catch up and eventually surpass the Faber model (e.g. in recent years, the pattern was that the Faber model lagged in the early 2000s, then led from 2008 - 2012, at which point the market "caught up" again). However, with initial lump-sum, you don't really get the opportunity to catch up because you aren't buying at the dips anymore.


----------



## cainvest (May 1, 2013)

cjk2 said:


> cainvest: I forgot to mention, from what I read in the Faber article, it seems that they were testing "buy-and-hold". i.e. a lump sum investment at the beginning, and then compared it over time. Is this correct?


The model can be used with any investment scheme, lump sum, yearly sum or monthly DCA ... don't believe it really matters. The only difference is if you're in the market or you're out of the market. If the price is greater than the 10 month SMA (you continue to buy at your regular interval) or if price is less than the 10 month SMA you'd sell and park it all in cash (HISA or whatever). You can always test additions to this model, like if you're out of the market and the price falls greater than [insert threshold, e.g. 20%] below your sell point you start your buy cycle again. Of course at that point you'd be along for the ride until the price rose above the 10 month SMA again to reset your sell trigger.


----------



## cjk2 (Sep 19, 2012)

^ Sorry, I didn't make myself clear. I realize the rules can be applied to either DCA or buy-and-hold (which is why I ran tests for both scenarios). What I meant was, the conclusions drawn in the Faber article (along with the graphs) only show the outcomes for a buy-and-hold investor; they seem to ignore DCA.

Therefore the results are skewed in favour of the Faber timing model, because in my own tests I found that it definitely out-performed a regular buy-and-hold (non-timing) portfolio. But I think most of us here are actually DCA investors (except for the lucky retired folks!). And in such a case, the results are less conclusive for a timing model.

Which is why I stated I will stick with regular DCA for now, but switch to the Faber model when I retire.


----------



## cainvest (May 1, 2013)

Correct on the Faber paper but I seem to recall you were using a much shorter time frame (10 years or so?) and that'll change the results.


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> Pluto: sorry, I was too busy last week to run the tests on your strategy, but I am still interested. I just downloaded the US GDP for the past 14 years, however where do you get the data for the Wilshire Total Market? I can only find data for the Wilshire Index...could you point me in the right direction?


No need to be sorry, there is no rush. If you click on the attachment/link in this post you should get a chart of the ratio. Plus another link: 

http://www.gurufocus.com/stock-market-valuations.php


----------



## cjk2 (Sep 19, 2012)

^ That's just a chart though...it's hard to get exact dates on when the lines cross. Is there a table with data somewhere?


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> ^ That's just a chart though...it's hard to get exact dates on when the lines cross. Is there a table with data somewhere?


If you go to the link provided, and put your mouse pointer on the chart a little window should appear giving the values, and dates.

I'm not sure that precise dates matter. For instance, the market was over valued from approximately June 97 to Dec 2001. But the precise dates don't matter, because no action is taken not sell signal is triggered - due to over valuation alone. 

The sell signal is the first cross below the 270 day ma after the market became over valued. 

So the dates of the sell/ buy signals for the S&P,
Oct 6 2000, sell. April 28, 2003, buy. 

The market was overvalued in 2007, so the next time it falls below the MA, it s a sell. 
Dec 31, 2007 sell. July 20, 2009, buy. 

So, for your test period, there are only two sell signals, and two buy signals. 

Just to reiterate what's being tested.
When the market becomes over valued, continue DCAing until the market index crosses below the 270 day ma. At that point, sell and stop buying. When the index crosses from below the 270 day ma, buy, and continue DCAing.


----------



## cjk2 (Sep 19, 2012)

Well, I do need precise dates to set boundaries for the data...maybe you're right that it won't make a difference if the date is a month or two off though. I'll just go by the 3-month data points available on the graph then.

A question about your sell/buy signals: what happens when the market is _under_valued? Do you always buy in that case? Or does it still depend on the moving average? E.g. let's say the market becomes overvalued and price drops below 270-day MA. This is a sell signal. What happens if the market later becomes undervalued, but the share price remains below 270-day MA? Do you buy back immediately and start DCA-ing, or still wait for the share price to rise above 270-day MA before buying?


----------



## Pluto (Sep 12, 2013)

cjk2 said:


> Well, I do need precise dates to set boundaries for the data...maybe you're right that it won't make a difference if the date is a month or two off though. I'll just go by the 3-month data points available on the graph then.
> 
> A question about your sell/buy signals: what happens when the market is _under_valued? Do you always buy in that case? Or does it still depend on the moving average? E.g. let's say the market becomes overvalued and price drops below 270-day MA. This is a sell signal. What happens if the market later becomes undervalued, but the share price remains below 270-day MA? Do you buy back immediately and start DCA-ing, or still wait for the share price to rise above 270-day MA before buying?


That's a very good question. To propose this and be testable I had to come up with simple rules, and the cross from below to above was testable so I went with it. 

In actual practice, once I got use to this system, I bought earlier than the crossover based on measures of under valuation, a subjective evaluation of how far the price was below the ma, and how much time had passed since the crash began - not too early and give it time to play out. IE, the average bear market is about 9 months, the shortest bear market is about 2 months, so buying two weeks after a sell signal is probably too early. But such subjective evaluations aren't easy to back test because there are no simple rules. Too there is a problem in that even though a market plunges, it doesn't necessarily become "under valued" in a way that we might want or hope for. It is a bad idea to wait for a specific level of under valuation before buying, as the market can take off and leave one behind. So the crossover from below is a easily observable and testable point. 

So, in practice, I only use the rules as guidelines. And if a market becomes undervalued before a buy signal, yes, I buy on down days after a series of high volume down days when the price is way below the ma. On the sell side, I don't necessarily wait for a cross over, but might sell early into rallies. And I don't necessarily sell everything. If I don't know what to do, the system is what I fall back on. 

By all means, feel free to adjust the system, and start buying earlier than the crossover when the market is undervalued to see how it compares with the simple crossover rule. By tinkering, and testing this system, I think you are going to develop a method to make more money than you would otherwise.


----------



## cjk2 (Sep 19, 2012)

Interesting explanation of your system. It does sound more complex than simple back-testing would be able to capture. I've run the tests using 2 variations of your strategy (A. buying immediately when market becomes undervalued, or B. waiting until price > MA to buy even when market is undervalued), and it does provide greater returns than regular DCA--at least for the US Index and International Index. For the Canadian Index, however, I don't think this strategy performs much better than regular DCA.

So looking just at the US and International Index: Variation B performed significantly better, while also greatly reducing volatility. Variation A offered slightly better returns but still had pretty significant volatility. I'll put together the numbers and see if I can post the graphs as well in a following post.

I really like that this strategy seems to improve upon the Faber model, by eliminating a lot of noise/unnecessary trading when the market is undervalued. However, I do have some concerns that these great results aren't sustainable long-term (like many market-timing strategies). Really, the data is only within the last 15 years or so. I would've liked to backtest it further, but it seems like before 1997, the market was always undervalued so this strategy would be meaningless. Pluto, what are your thoughts on this?


----------



## cjk2 (Sep 19, 2012)

Results, assuming DCA every 14 days, testing with 270-day MA:
(shows % gain of US Index, CDN Index, International Index, and Total)

*No timing: *63.2%, 63.4%, 46.2%, 57.6%
*Faber model: *61.1%, 76.1%, 53.8%, 63.7%
*Pluto, variation A: *73.7%, 54.7%, 51.8%, 60.1%
*Pluto, variation B: *91.2%, 54.2%, 80.3%, 75.2%


*Graphs: *(thin lines show regular DCA with no timing scenario; thick lines show timing scenarios; note that in order to keep all the lines closer together, I've plotted the "total" line on the secondary Y axis)























Pluto, as you can see, your strategy does not work well with the Canadian Index. Variation B is far superior to Variation A. Variation B resembles the Faber model, but with higher returns (with the US and Intl indexes).

Once again though, this is such a small window of time I'm not sure any meaningful conclusions can be drawn. There's really only one crash that occurred in this time period--so just because this model worked great with the 07/08 crash, doesn't mean the same will happen with the next one. 

As a side note, I'm surprised by how closely the International Index resembles the US Index, while the Canadian Index is quite a bit different. I'm not familiar with international stock markets, so I wonder why this is?


----------

