Wednesday, September 17, 2014

Dollar Cost Averaging is Voodoo or what?

I must first qualify myself that of the 3 — Averaging down, Scaling in, and Dollar cost averaging — I’ve never done Dollar cost averaging myself.

So unlike my other posts on this topic, I’m totally speaking from an academic perspective.

Dollar cost averaging is usually spoken in the same breath with passive index funds or ETFs. Although I think its just as valid as an accumulation strategy for building a core position in a single stock.

Most people who practice Dollar cost averaging have in fact outsourced this activity to their broker or the financial institution where they have signed up for the plan.

Sometimes it’s better to not peek into the kitchen of your favourite eating places.

Let’s take a moment and make believe you prefer to do this Dollar cost averaging for let’s say the STI ETF DIY style.

Your plan is to allocate $1,000 as your Dollar cost average to be invested per month.

Immediately you are faced with 2 head scratchers:

1) Which day of the month should you buy? One the first Monday, third Wednesday or last Friday of the month?

2) After deciding on a fixed day of the month, what time of the day should you buy? At 10:00 am? 1:00 pm? 4:00 pm?

Have anyone discovered the voodoo part?

Yes!

Price is not on the menu!

You just close your eyes, pinch your nose with your thumb and index finger with one hand, and press the buy button with your other hand!

Is that voodoo or what.

Be honest. When was the last time you bought a stock without looking at the market price?

So what’s the main benefit of Dollar cost averaging? There must be one, right?

Well, you get to say: Look mom! No brains!

Just kidding!

The main benefit is that come high water or brimstone, you just calmly stick with your Dollar cost averaging plan.

You don’t care whether there’s a war, coup, revolution, fire or flood. Neither are you bothered with nuclear radiation, Sars or Ebola. Whether the market is up 20% or down 50%. You just continue to close your eyes, pinch your nose, and jump into the market at your pre-determined calendar day and time of day.

That would also mean you don’t have to monitor the markets, don’t have to sharpen the saw on your investing/trading skills, don’t need to watch the news, and definitely no need to read financial blogs!

You free up your precious time to focus on your career, business, and more importantly — your family.

Without this benefit, I can’t think of any other reasons why anyone would want to engage in Dollar cost averaging.

Want to bet whether Dollar cost averaging is something you bought into yourself through your own volition? Or is it, like most insurance, something you were sold to.