A different type of dollar cost averaging

What do people think of this idea- You pick a general market index level, say 13,200 on the DOW. You dollar cost average every month into the DOW, maybe through an ETF like DIA. But when the DOW is above 13,200 you only put a small amount, say $100 into it. When the DOW is below 13,200, you increase the amount of your dollar cost averaging, say like $200 for every 100 points lower it goes. This way you are going beyond the usual rule of equal amounts into the D.C.A. and then you are getting even more shares when the price is lower. Does this make any sense?

Answers

ChaosNantuko answered a question in General Market.
1786 points

ChaosNantuko answered one year ago …

I believe dollar cost averaging is most effective in up-trending markets. If a security is trading sideways, your average cost will be the same as the equity price. If it trades downwards, you lose money. So then if dollar cost averaging only works for uptrending markets, but you buy smaller amounts when its over a certain amount, it seems to me like your going to be buying smaller and smaller amounts of the security throughout the year (assuming it goes up). Instead of investing based on a fixed number such as 13200, you may want to use a more variable system. My recommendation would be to choose a base level. A minimum investment. 500 for arguments sake. Then choose a maximum investment. Lets go with 1000. Every time you are putting money in, look at where the stock price is compared to the bollinger bands. Take the range of the bollinger bands, and calculate where it is in that range. If its in the middle of the two bands, you invest 750. If its near the top of the bands, invest 500, while if its near the bottom of the bands, invest 1000. That way, you still get in while its "undervalued", but the definition of undervalued changes over the year based on whats happened so far. I would set the bollinger bands to a 50 day moving average, and use 1.5 standard deviations.

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josephconlin answered a question in General Market.
226 points

josephconlin answered one year ago …

I think that the whole point of D.C.A is to try and avoid having to time the market, but you are trying to time the market with this approach. What would you do with the extra money from the times that you didn't invest your regular amount? If you use it rather than save it, you've lost any chance to get a return on that amount. If you feel that you have enough technical ability to time the market a little bit, does it make sense to use a D.C.A approach? Wouldn't you do better to use your capital to pyramid your profits (see Teeka Tiwari at www.thetycoonreport.com) rather than D.C.A? Lastly, I think D.C.A is best used for long term holdings, so hopefully even the higher prices will seem pretty low when you start selling in 20 years or so.

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josephconlin answered a question in General Market.
226 points

josephconlin answered one year ago …

I think that the whole point of D.C.A is to try and avoid having to time the market, but you are trying to time the market with this approach. What would you do with the extra money from the times that you didn't invest your regular amount? If you use it rather than save it, you've lost any chance to get a return on that amount. If you feel that you have enough technical ability to time the market a little bit, does it make sense to use a D.C.A approach? Wouldn't you do better to use your capital to pyramid your profits (see Teeka Tiwari at www.thetycoonreport.com) rather than D.C.A? Lastly, I think D.C.A is best used for long term holdings, so hopefully even the higher prices will seem pretty low when you start selling in 20 years or so.

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