Lump sum investments into the market usually offer the best returns but dollar cost averaging can help you avoid the pain of unexpected declines.
Bill Flanagan eloquently stated on Moneytalk back on June 2006 that dollar cost averaging (or DCA) was for the timid and not a good idea for getting the best long-term investment results.
Bill made the point if you believe the market is going to be higher in the future, then you should lump sum your money in ASAP. The reason you do this is the odds favor being in the market so the sooner you are in the better your odds are of making maximum returns.
I agree with Bill. I tell new subscribers to my newsletter that if they want to get my advertised returns going forward, then they have to plug their noses, duplicate my portfolio exactly, and mirror my moves exactly. Since I have very large gains and some cushion for short-term losses, I can handle market declines since I would still be up and they would be down. For this reason, I suggest they might want to dollar cost average into my recommended positions to avoid the pain of sudden losses but they will not get my returns going forward.
- If you believe the market will be higher in the long term, then you usually get the best returns going forward if you lump sum into the market. Corrections can be painful, but you are investing for the long term. You only recommend dollar cost averaging if you believe the pain of corrections outweighs the potential for higher returns.
Bob Brinker recommends DCA almost all the time. For example, Brinker has been mostly recommending DCA since he told his listeners in March 2003 that he recommended a fully invested position. Read David Korn's summary of this here. Rare exceptions for DCA by Brinker are after the market has had a significant correction, such as the S&P 500's recent correction where Brinker has a buy in the "mid 1400's."
Bill Flanagan correctly states that the odds favor the market going up so it make sense to lump sum in ASAP in most all situations. He is 100% correct.
Newsletter writers such as Brinker and I have learned over the years that people hate to lose 10% but they hardly complain if they only make 10% rather than 20% from being too conservative. That is they hardly feel 10% in "lost opportunity to the upside" but they feel terrible about an actual 10% loss to the downside. Thus, telling people to dollar cost average helps them not only get into the market but stay in the market for the long term should there be a significant market correction soon after they start their DCA program.
Bill Flanagan is a regular guest host of ABC's "Moneytalk" and author of Dirty Rotten CEOs. Read more about Bill Flanagan here and feel free to offer comments about his dollar cost average comments or this article.
Bob Brinker is the regular host of ABC's "Moneytalk" and author of Marketimer newsletter. We also have a Bob Brinker Discussion Forum that many like to use to discuss the market, Bob Brinker's general advice and Marketimer newsletter.
I look forward to your comments about this article or those radio hosts in general.
Hi,
ReplyDeleteI find your analysis of Brinker's one major fiasco to be right on, I still have not recovered from that advice.
However, as far as Flanagan is concerned, the only possibly useful advice he has ever given is the comments about all in if you think the market will be higher. Imagine that advice if you combine it with the Brinker QQQ disaster.
I find your information extremely compelling, although it tends to be, at least on the surface, a lot more technically driven than Brinker's advice, and perhaps less easy to understand. As a potential retiree in a couple of years could I really benefit from your newsletter or is it for the long term trader rather than for a guy who is looking for income soon and wants to sleep at nite on the investments not being used as income.
Thanks for the kind words.
ReplyDeleteI advise a "Core and Explore” approach to investing.
Core means place 80 to 99% of your money into a CORE portfolio of well diversified, buy-and-hold, no load mutual funds (or a portfolio of diversified blue chip stocks) then Explore with the remainder as you learn. I offer two of these in my newsletter, a core conservative and core aggressive, that are made up of the same seven index funds from Vanguard, but with different weightings.
With the remaining 1 to 20%, you can use my "explore portfolio" which uses both stock picking and a bit of market timing, etc. to see if you can beat the averages. If you do, then that portion of your portfolio grows faster and you get to critical mass faster. If you don’t beat the averages "exploring", then the smaller portion allocated to personal active management doesn't significantly impact your overall goal of reaching critical mass.
My newsletter is usually 35 pages with the first 11 pages for the overall market updates you are used to with many other newsletters then about 20 pages where each security in my explore portfolio gets a full page, then a few “boiler plate” pages at the end that change very little.
In another file I send monthly, I update my list of every buy and sell for the portfolio by date back to inception in 1998 so there is nothing hidden with a “sell” after it lost money. I feel having bad stocks on my record gives it credibility, which I need since my success is admittedly hard to believe.
For you, I’d recommend my “conservative core portfolio” for most or all your assets. That portfolio did very well even in the bear market between March 2000 and October 2002. It lost some money, but hardly enough to lose sleep over compared to the S&P500 which lost about 50%.
You could use the signals I use to buy and sell explore securities to add or subtract from your index funds. This would be using the signals to tell you when to rebalance rather than rebalancing on a regular schedule.
Read my article “Using asset allocation to Make Money in a Flat Market” to get a better idea of how this works.
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