Is everyone else making more money than me?
Questions:
Am I getting the most out of my investments?
Are my investments making more or less than the automatic 401k's in the S&P 500?
Should I self-manage or robo invest?
Story: What is Dollar Cost Averaging - DCA ?1
It's an investment strategy where you make equal monthly investments/payments into an index fund (or a few index funds).
The concept is that the money buys more stock when the price of a stock or fund goes down and less stock when the price goes up. As an example let's say you invest $500 a month, every month in Vanguard FTSE Social Index Fund Admiral Shares
This strategy is great for smoothing out volatility in the market.
Referenced Info:
The idea for this blog came from Putting Dollar Cost Average on Steroids (It's behind a paywall)
Better DCA
Putting Dollar Cost Average on Steroids (aka DCA Plus)
The stock market generally goes up 68% of the time, and goes down 32% of the time on a quarterly basis.2
The MDCA strategy is to invest 2-3x ($1000-$1500) your normal investment amount during down months.
On up months you could skip the investment until you catch up, invest the original amount, or invest less. (i.e. $250)
This strategy benefits the most from volatitility in the market.
It's difficult to predict how much better MDCA will perform as it depends on the time frame chosen.
Better DCA
Sam from financial samurai blog describes a modified DCA where in addition to the monthly investments he will re-invest when the stock market is down more than 1% in a day or down 1% from his last monthly investment.
He will also lower his monthly contributions to be 50% less when the stock market is up from month to month.
Analysis
Using data from a long running S&P index fund, SPY, I was able to ascertain that Better DCA outperforms DCA Plus by about 3-4% and DCA by about 6-7% over the past 20 years.
From 2018-2020 the year over year return on your money was 1-2% in the SPY index fund. This strongly suggests that money invested in SPY (or SPY like investments) should be re-allocated to higher yielding investments and/or cash.
Asset Re-Allocation
The Buffett indicator measures total market capitalization to GDP. It used as a broad way of assessing whether the country’s stock market is overvalued or undervalued, compared to a historical average. Latest Buffet Indicator Data
In combination with implementing a better DCA strategy, I also re-allocate a percentage of my assets. Since 2017 I've been selling 10% of my market investments every year that the Buffett Indicator3 states that the stock market is significantly overvalued.
I re-allocate that money to either paying off debt/mortgage, real estate investments, or fine wine investments. Sometimes I'll move to cash so I have dry powder for implementing the better DCA strategy.
Chen, James. Dollar-Cost Averaging. Investopedia (accessed 2021) ↩︎
Carlson, Ben. 2015. Playing the Probabilities. A Wealth Of Common Sense (accessed 2021) ↩︎
Buffett Indicator: Where Are We with Market Valuations?. gurufocus (accessed 2021) ↩︎