Does Dollar Cost Averaging Work?

make strategies for your IRA your IRA today we did something very interesting and I want to thank one of our our viewers for leading us down this path and helping us with today's session jvm and RJ and B I'm sorry and just a quick little discussion I think I find this really interesting today so bear with me check it out let's take let's go there are two competing theories this is for people with IRA accounts they're always interested in kind of the difference between dollar cost averaging and lump sum investing there have been numerous studies on this you can google you can Google or Bing Bing probably 10 different studies on on just different theories but you hear all the time people talk about dollar cost averaging and then you talk about people accumulating stock you know whether the decision is lump sum and I thought it's I just thought to have this discussion once and for all because even with derivatives everything's the same like in other words it doesn't matter what the underlying is conceptually here let's just play through all the numbers and see what works best because this is always kind of a big question mark for a lot of people there are two competing theories for strategies to accumulate stock and or any other underlying throughout almost history doesn't make a difference lump sum investing in dollar cost averaging will refer to dollar cost averaging as dca many industry analysts believe that dollar cost averaging has superior returns which we find interesting because I'm not sure if anybody's ever done the research to figure this out it's always been something that's been said right today we will consider whether or not this is in fact the case but first we need to define what is meant by each let's go to the next slide while lump sum investing can simply be defined as buying a certain dollar amount of equity at a given time and then just letting it sit their dollar cost averaging has no such simple definition some of the more common dollar cost averaging strategies include a percent off a 52-week hide this strategy is the purchase of a stock whenever closes within a certain percentage of a 52-week high common percentage amounts maybe five ten or twenty five percent off the high same thing done with you know different mutual funds and everything else we're just we're trying to come up with some methodology of how you would determine you know effectively dot cross averaging is it on it is it on a timely basis like once a month is it is it off based off a certain every two weeks right or a certain price or a certain percentage off the high whatever it is let's go next slide if a stock closes below its 200-day moving average is something that a lot of funds will use in other words so professionally managed funds may say if a stock closes below its 200 moving the average another popular technique is to buy a fixed dollar amount whenever the stock closes below that right just simple we're just talking about some of the popular techniques there's another school of thought that says to accumulate every day with this strategy a fixed dollar amount is used every single day this the higher the stock the less will buy the lower the price the more will accumulate correct okay that's a classic way I've always been shown it we ran a study comparing these different strategies looking at the spy and the cues the fixed dollar amount we used a fixed our amount used was a hundred dollars in each case we started with a thousand shares of the underlying each market was analyzed from its earliest collect earliest collectible trade date through July 8th 2013 now please note regardless of which study we used because it did it in the end it didn't make any difference at all so every study went back and compared against against again against different approaches different methodologies different studies every study came out virtually the same way all of these dollar cost averaging strategies were compared against simply buying a thousand shares of whatever the underlying was on the first day's close because each strategy ends with a different number of shares the P&L results are on a per share basis take is one you buy a thousand shares and one you're you know your dollar cost averaging into that awesome fixed amount well it was easiest way to bucket it right I mean right just how much do we make on a per share basis and does it really matter what strategy we use and the answer's no okay so what's interesting here is that what we did is we started in 50 and we end and here you can and me and the NASA that's in the aspx we did from January of 1952 and in the Nasdaq we started in 1971 and all the data that we had that's right no reason to it and again we're looking at it you can see how how it didn't make any difference except that whether we did 5% 10% 20% below the 200-day moving average or every single day the lump-sum outperformed and the same thing on the Nasdaq surprisingly it didn't it didn't make a single bit of difference correct so the whole idea that this dollar cost averaging is a strategy is ridiculous correct and anything that would be managed would be even more ridiculous because then you're gonna have those fees taken out there's a reason before you get to the next slide there's a reason why we did this because in order for us to prove that to be a do-it-yourself in order for us to prove that as a do-it-yourselfer you will ultimately outperform because of your understanding of the Marcus you have to understand why traditional theory doesn't pay you are going to pay for a manager managers management whatever you want to call it to do this 5% 10% 20% below the two Haeundae moving average or every day to manage that dollar cost averaging it has long been sold as a mechanism for improving your returns without any historical basis correct so it's been sold now what happens in the end is these are without fees if you subtract fees your portfolio return first lump sum is 40% worse 35 to 40% worse so once you paid for fees for having a professionally managed to get to the point where you can underperform just in the end to use some sophisticated methods like going below the 200-day moving average is 100 perform lump sum investing it's ridiculous it's fascinating don't say it's ridiculous it's fascinating because because you didn't know it was ridiculous okay so what she's seen the results so I can that's innate so I can tell you over the years just based on my own parents who have used services in the past that said we are able to dollar-cost average to bring you a return that you could never do on your own that's the sales it's great well yeah but I didn't know that no business and I'm like and I would be like that doesn't make any sense to me but whatever obviously they've done their research well they didn't do their research he never did the research they just said it cuz nobody did the research in fact I can tell you right now that there's a that that that there are plenty of things out there today that I watch that say hey all you have to do is head this and this and do this six times a year and do this and it's all crap and in return for that we'll charge you one in the quarter percent remember Merrill just raised their rates from 1% to whatever it is now one point three five percent okay so by thirty five basis points where I showed you guys that the other day all for what for a worse return or starting with any more funds meet lump sum investing it's scary this stuff will all be archived you can have your have your way with it let's go the next slide please both the SPX the Nasdaq look in both Annette SPS the Nasdaq the lump sum beat all other dollar cost averaging strategies retested next we ran the study for an individual equity for this study we chose Apple and again we weren't trying to curve fit it we just you know Apple is the most actively traded stock on a retail basis period what's the her fitting anybody who was accumulating stock on any type of randomness or even if they're doing it by by five ten or twenty percent I'm just saying Apple is an up stock okay I'm just saying well we're not trying to pick a stock where it worked for us we're picking the most actively traded stock by retail customers we're looking to see if the binary nature of an individual equity as opposed to an ETF we'd have any effect on the outcome that's all we just want to say as opposed to picking that other study where they came out with a they bought in 1973 six months before look at everybody low six was before the low then sold the other high let's come next slide here let's take a look at Apple so what's what's interesting here is that and again the average price yes we'll just we'll just take you through we'll take you through this is going back to 1984 1984 correct pretty interesting mm-hmm okay and there you see some beats if on the on the on the right hand side there's the P&L per share correct the P&L per share 395 dollars positive is your P&L per share verse you know and again the the the middle column is the average price you ultimately ended up paying for the stock correct long every day is the worst lump sums the best yeah I mean I mean that's not this that's not what we're trying to show you here what we're trying to show you here is it just doesn't matter I mean you don't need to go that route you can do much better on your own well again depending this is without basis improvement this the argument here the argument in the end is can I outperform again this is my IRA account my objective here is to keep my fees as low as possible because I know in the end I'm going to pay a lot of money and fees if I have my money professional quote professionally managed where is the advantage it is the advantage engagement because if it is that's all I can figure out correct my the negative piece to my account is that I can't stay engaged now if that's if that's the price have to pay one the quarter percent for then that's a whole different discussion then maybe it's worth a few well that's a whole different discussion but assuming that you can stay engaged okay then there's no formula out there if it's the only account you're trading in then then you should be engaged again if you love one of a small amount of accounts you have you should be engaged lump sum invest if it's a socket chase that falls on the floor the poor guy who's working everyday then maybe you don't have to be engaged with it lump sum investing beats all they're averaging strategies in terms of P&L per share no form of active accumulation we considered appeared to beat out just buying shares over the long run what many professionals what many investing professionals may believe is simply not the case and again this is without fees correct so the next time some of your numbers right so so here's the reason I want to do this I make a case that everybody should be a do-it-yourself investor because at the worst all you can do is improve your basis and improve your domain skills at the best which you learn about being a do-it-yourself investor is that you don't need anything else as far as out performance goes you're going to outperform by just lump sum investing verse many of the methods of accumulating wealth correct especially have you money managed well in an IRA account then is the CI can never really visualize lump sum investing for me it's just impossible to visualize it because I always want to run improve basis but there are people listening to us today that do lump sum investing and they can't work compute their table in the year the fungi are a or whatever before March with the case may be anyway that's the argument that's a long form argument it is I've read multiple studies on this subject everything comes back to where's the research that says you know investing at those times is better I mean it's always something I've always heard from my entire life you know listen down low cost average is best way to go yeah I'll perform the market everybody everybody talks about it and I just think you have to put some of these things just put them to bed because they're dot rel is an old it's not a strategy right right a strategy is reducing basis a strategy is enhancing return dollar cost averaging is not a strategy right okay it's okay it's a save yeah I got it and you can put positions on at different prices I mean you know that's that's what you feel but it's just it's not strategy just a trade awesome well come back with the opening bell next yeah we got plenty of time for it good you this is a get tasty on a taste trade network

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Length: 13min 0sec (780 seconds)

Published: Tue Aug 13 2013