# Dollar cost averaging and buying stocks?



## Tornbysaber (Nov 25, 2012)

Hi everyone,

I am new to the whole active investment game, so far most of my investments are in mutual funds through regular contribution. 

Everything I read said that the best "strategy" is to buy and hold through regular contribution and timing the market should be avoided. 

It got me thinking, does dollar cost averaging work on buying American stocks? Assuming a regular contribution of 500 dollars every two weeks, with all the fees and commisions I really dont see how it's a viable option, or am I missing something here?


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## Cal (Jun 17, 2009)

Due to the fluctuation in stock prices, and depending upon what your transaction fee is, you may just want to sit on the cash unitl you see a good buy price, or until you have enough invested to have a reduced transaction cost.

You haven't provided info on what broker you are using or how much you pay per transaction.


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## MrMatt (Dec 21, 2011)

Tornbysaber said:


> Hi everyone,
> 
> I am new to the whole active investment game, so far most of my investments are in mutual funds through regular contribution.
> 
> ...


A very good strategy is come up with a simple plan and follow it. 
Invest money when you have it, hopefully on a regular basis, into a balanced and diversified portfolio.


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## FrugalTrader (Oct 13, 2008)

Some brokers like iTrade offer commission free ETFs. I can see these being a great candidate for DCF.


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## Jungle (Feb 17, 2010)

You can DCA with stocks. Just add to your positions once every quarter or so. Questrade or IB offer cheap comissions to help with this. This is assuming you have a good base started (30-50K)


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## Young&Ambitious (Aug 11, 2010)

I'd go with Cal's recommendation which is essentially dollar value averaging.


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## Toronto.gal (Jan 8, 2010)

Tornbysaber said:


> *most of my investments are in mutual funds* through regular contribution........


And how are those investments doing? Think about that before you contribute to new investments.


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## Oldroe (Sep 18, 2009)

Often Quoted " do not time the market".

Then the writer will go on to Quoting P/E,Beta,50 day avg, 200 day avg. and many more. All these calculations are for market timing.

What you can't do is perfectly time the market.

What you need to do is time market the very best you can.


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## Guigz (Oct 28, 2010)

Oldroe said:


> What you need to do is time market the very best you can.


As was previously mentionned by another poster, the alternative to market timing is value timing. Buy when the price is attractive relative to the equity (or other value indicators) behind the stock.


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## cardhu (May 26, 2009)

Dollar cost averaging is a convenience, not a “strategy” ... at least, not in the sense that it offers any financial advantage ... it might be fair to say that it is a behavioural strategy, and that is almost always the reason it is suggested ... people with poor financial habits, who might otherwise have difficulty saving, can benefit from the regularity of a DCA approach, where the movement of money into savings or investment is done on an automated, scheduled basis, without their having to think about it ... if you are not one of those people, then DCA has little to offer. 

The best time to set money aside is when you have it ... that may or may not coincide with the best time to invest said money ... I have no qualms about allowing cash to accumulate during periods when I feel there are no particular bargains on my watch list.


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## Toronto.gal (Jan 8, 2010)

cardhu said:


> 1. people with poor financial habits, who might otherwise have difficulty saving, can benefit from the regularity of a DCA approach, where the movement of money into savings or investment is done on an automated, scheduled basis..
> 
> 2. DCA has little to offer.
> 
> 3. The best time to set money aside is when you have it....I have no qualms about allowing cash to accumulate during periods when I feel there are no particular bargains on my watch list


*1.* Not exactly what DCA is about. 
http://bucks.blogs.nytimes.com/2012/02/21/dollar-cost-averaging-an-emotional-insurance-policy/

*2.* It does serve a purpose. The article is self-explanatory.

*3.* When are you going to set money aside, when u don't have it? Sorry, I could not help myself. 

Cash is ALWAYS good to have, especially during periods of volatility, otherwise, how would one take advantage of buying opportunities?


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## underemployedactor (Oct 22, 2011)

Interesting NYT article, though I must say it appears to support cardhu's thesis. I think "automate good behaviour" is my favourite phrase from it. Sounds like something they would push at an Investor's Group sales seminar.
I disagree with the last line, however. I think when you ignore the market and blindly throw money into some vehicle without paying any attention is what will get you into real trouble.


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## Toronto.gal (Jan 8, 2010)

underemployedactor said:


> 1. it appears to support cardhu's thesis.
> 2. disagree with the last line, however. I think when you ignore the market and blindly throw money into some vehicle without paying any attention is what will get you into real trouble.


*1.* Yes, but not entirely as what cardhu was referring to, was more a 'systematic investing' technique to help a person save, rather than a DCA'ing strategy per se, which is more to do with reducing market risks by spreading the cost over a period of time.










*2.* I don't disagree with the last lines of the article:

*a) 'Have a written plan and stick with it, no matter what the market might do'.* - Simply states to be disciplined to your *own* plan, which is not the same as saying to follow the market blindly, or that you must never change such a plan. The whole idea with DCA'ing, is to buy at different prices & to help control emotions.

*b) 'The moment you start reacting to the market you’ll get into trouble real fast.'* - I interpret this as simply avoid panicking.


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## underemployedactor (Oct 22, 2011)

Not to split hairs here, but your boxed example of DCA is really an example of systematic investing as defined by the NYT article you originally quoted. So it sounds to me that you are arguing the merits of systematic investing as a way of wringing the emotions out of investing. 
I think you're being rather generous with your interpretation of "have a written plan....etc" He sounds pretty emphatic on this point.
I don't see reacting as being synonymous with panicking. I think you must always be ready to react to the market which doesn't necessarily suggest panic.
But perhaps these are just symantic quibbles. Interesting food for thought, though.
BTW, do you consider yourself a systematic investor?
thanks for your thoughts.


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## scomac (Aug 22, 2009)

Toronto.gal said:


> *1.* Not exactly what DCA is about.
> http://bucks.blogs.nytimes.com/2012/02/21/dollar-cost-averaging-an-emotional-insurance-policy/
> 
> *2.* It does serve a purpose. The article is self-explanatory.


I'm sorry, T.gal, but cardhu is correct. In fact, the article that you have linked to supports what he is saying.


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## Toronto.gal (Jan 8, 2010)

underemployedactor said:


> 1. Not to split hairs here
> 2. I think you're being rather generous with your interpretation of "have a written plan....etc"
> 3. do you consider yourself a systematic investor?


*1.* I don't mind; can be fun sometimes. 
*2.* Maybe so.
*3.* I'm a combination of sorts.

I didn't fully disagree with cardhu. It's all related after all & no matter the label, both are systematic strategies [methodical & regular], but not necessarily with the identical purpose in mind. My own hairsplitting/half disagreement was about the fact that:

1. DCA does serve a role & it's indeed a strategy. Call it 'behavioral' or whatever other adjective you wish to attach to it, but the fact of the matter is that there are behavioral traits in all strategies. There is a reason for Benjamin Graham's famous quote: 'The investor's chief problem - and even his worst enemy - is likely to be himself'. Have any of you read any books about behavioral investing?

2. It's also much more than a mere 'convenience for those with poor financial habits'. If I was defining/explaining DCA to someone, I would not start by saying that DCA is good for setting x amount aside regularly, and that it had no financial advantage. Like any strategy, none come without risks. 

3. When making regular contributions [based on equal payments or not/automated scheduled basis or not], naturally the investor will be buying at different prices, but the key purpose of DCA'ing is to generally manage/reduce risk [from fluctuating market prices], not to improve your 'poor financial habits'. Of course it goes without saying, that if you're able to buy shares at lower prices from systematic purchases, that you're also saving.

I do believe that for the average investor, DCA is effective, but I won't get into the numerical & empirical comparisons between strategies, as that's another topic that cardhu started, but gave no evidence of why it does not work.


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## jgueld (Jan 28, 2011)

To the OP
I know exactly what you are up against as a novice active investor. I had an account with mutual funds in it and I made one ETF purchase (7G) the fee cost me $399 - excuse me. I went in to ask why so much for one transaction and was told that's the way it is (RBC) some more digging and I became aware that I had a Money Management Account (or something like that). When I first opened the account I had no idea of the various services available and there is very little written how to actively become financially involved. When I bought the ETF, something changed - I became actively involved and the wanted to start "managing" my own funds. No one stopped me to say, "hey we have a cheaper alternative for you if you want to manage your own funds." It cost me $399 to figure that out - fool me once shame on you, fool me twice ....
Novice's lesson - what type of account do you have and is that account meant for someone who wants to do more active trading, DCA or not.
FWIW - changed accounts where trades now cost me $6.99.
Moral - learn about the various services that institutions offer and understand them and understand what you want to do.


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## cardhu (May 26, 2009)

T-gal ... I know quite well what DCA is about, thank you ... the fact that some fp from Utah chooses to reserve that name for only one specific variant of it is immaterial. 

Aside from the author’s personal nomenclature choices, which I disagree with, his article is entirely consistent with my point ... as an investment strategy, DCA doesn’t make much sense, but it can offer an emotional (ie. behavioural) crutch for those who need one.

Sure, in the “lump sum waiting to be invested” scenario, there is a risk-dampening effect to NOT going 100% equities from day one ... if you have $100,000 ready to go, which you plan to shift into equity in $10k increments over 10 equal monthly purchases, your asset allocation would be 90% cash/10% equity in the first month, 80% cash/20% equity in the second month, and so on until you reach 100% equity in the tenth month ... the risk is reduced during that 10 month period because your asset allocation includes a whack of cash for most of that time ... to attribute that risk reduction to anything other than the fact that you were holding cash is, in my opinion, a dubious assumption ... the DCA effect of “buying more shares when price is low and fewer when price is high” is neither here nor there ... it simply means that at the end of that 10 month period, you’ll either have more shares, or less shares, than you would have had if you’d gone whole hog from the get-go, and there’s no way to predict which it’ll be. 



T.gal said:


> When are you going to set money aside, when u don't have it? Sorry, I could not help myself.


Yeah, I know how it sounds ... it was an intentional deviation from the usual _“best time to invest is when you have money”_ ... my points being (1) that there’s nothing magical about rigidly adhering to a specific amount and timetable, for either investing or for setting money aside to invest, but (2) that a little discretion about the entry point is not a bad thing. 



T.gal said:


> Call it 'behavioral' or whatever,


Yanno ... you’re being very particular about word-meaning in this thread, considering you once told me that readers understand perfectly well that when you say _“the tax treaty does not apply”_, what you really mean is that it does ... had a change of heart about clarity, have you?


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

Dollar cost averaging has several advantages. One is, it allows you to accumulate more shares at lower cost over time because you automatically buy more shares when the price is low. Another is, it avoids the problem of timing the market. It also eases the pain and panic of watching your investments dive bomb. You can be philosophical, and feel oh well, at least you are picking up some bargain shares. This is not to be laughed at, you might be surprised the number of "long term" investors who watched the market drop 10%, 20%, 30% in 2008 and finally got out at the bottom because they could not stand the pain any longer. Just before the market took off in 2009.

The final advantage is it allows you to make a start and form good saving and investing habits. Everyone agrees it is easier to accumulate a sizeable fortune if you start early and stick with it over a lifetime.

There are plans that allow you to buy small amounts of stock, mutual funds or ETFs on a regular purchase plan without excessive commissions and fees, some even allow fractions of shares. Your stock broker should have the gory details.


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## Eclectic12 (Oct 20, 2010)

underemployedactor said:


> ...I don't see reacting as being synonymous with panicking. I think you must always be ready to react to the market which doesn't necessarily suggest panic...


Problem is, most people willing to talk investing except for CMF people here are running at about 80% "reacting = panic". So while I agree that they aren't the same, a lot depends on the individual investor. 


Cheers


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## Eclectic12 (Oct 20, 2010)

jgueld said:


> ... Moral - learn about the various services that institutions offer and understand them and understand what you want to do.


It is good that you've learned a lesson & are passing it on. 

It does raise the question that has always puzzled me ... why people who spend tons of time making sure they get the services they want or a price they like for furnace maintenance plans or whatever yet for some reason, don't treat financial services the same way.


Cheers


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## Oldroe (Sep 18, 2009)

DCA is very effective for short term, like TGal example (12 Months). If you are 5 years in and have a 40% correction you will have very little effect on you Avg. cost.

So that brings you to Avg. down. You need to think long and hard about this and also do the math. How much money for how much effect.

Most I've done it takes between 200% and 300% to have meaningful effect.


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## Toronto.gal (Jan 8, 2010)

Oldroe said:


> 1. DCA is very effective for short term, like TGal example (12 Months).
> 2. If you are 5 years in and have a 40% correction you will have very little effect on you Avg. cost.
> 3. So that brings you to Avg. down. You need to think long and hard about this and also do the math. How much money for how much effect.


*1.* I have used it for short & long-term.

*2.* As I also use the DCA strategy with DRIPS, it's even more effective as: a) my # of shares increase, b) hence my dividend payments [and free shares] increase as well, so the long-term strategy is effective.

*3.* Good effect without much money, if your # of shares [of the right stock] increases. And if the holding is long-term, I really don't care much about corrections; in fact, I prefer them.


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## Oldroe (Sep 18, 2009)

You haven't held anything for 5 years, so take your longest holding work out your avg. cost, then take 40% off today's share price, buy the same amount. 

You will have zero effect. 

Try it for 3 months you still will have little effect.


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## Toronto.gal (Jan 8, 2010)

Oldroe said:


> You haven't held anything for 5 years.....


This is true!

What is also true, is that by then, I will have covered a % of my investments with the dividend payments; depending on the yield of course, but on average, for some stocks, that could be as much as 25% of the initial investment and with just dividends [without even taking div. increases into account during that period {though of course there could be div. reductions/cuts, too}], and much higher even with additional capital.

At this stage, my focus is accumulation of shares, and volatility has given me the opportunity to do so with dividends + cash [and some of that cash coming from trading profits]. 

I don't really see how none of the above will have zero effect in the long-term of 20+ years, especially when I got started with stocks in 2009, ie: still very reasonable prices compared to the much higher ones prior to the 2008 crisis. 

Anyhow, I'll review your information. Thanks.


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## Oldroe (Sep 18, 2009)

Do yourself a favor stick to the rules of your example and run it out 60 months, then give yourself a 40% correction.


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## jgueld (Jan 28, 2011)

Eclectic12, thanks for the reply. 
It seems the OP was asking a number of questions, the first was about active investing and the second about DCA especially in US stocks. My reply addressed the first question about active investing, there really is very little information helping someone negotiate the initial steps. Most folks on this site assume everyone knows how to buy and sell but there are numerous ways in which one can buy and sell stuff. The act of finding out about different accounts and the terminology that goes along with that, is not intuitive (e.g. wealth management, self-directed and so on) and, as a novice, I'm finding that I have to learn all this even though I understand many of the strategies; it's the tactics that a difficult to negotiate and can cost quite a bit.
... still learning


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