Is now the time to buy shares?

[darag]

I am extremely dubious about the validity of this article. Apart from his use of language ("I feel that/It is my feeling that ...") he, similar to Rory, misrepresents the difference between DCA and investing via a lumpsum:

Like I said before, I didn't think there was much point in arguing about definitions but I think some of the disagreement regarding the validity of DCA in this thread is now due to differing definititions of DCA. In this regard yourself and charttrader are also somewhat guilty in "misrepresenting DCA" when you restrict your definition to applying DCA through-out the investment period and to situations where the investor is starting with a lump sum. DCA is generally accepted to cover far more investment strategies than this, so to dismiss DCA completely on the basis of a narrower definition is not entirely fair.

Regarding the validity of the article, I can't see why you'd be dubious besides the fact that he only agrees 90% with you. You might be swayed by the fact that it's not supposed to be an academic paper so the language is not academic. Howerver, he clearly explains this methodology and the data he's used and quantifies everything. He starts the article claiming he is a strong believer in DCA but ends it, having done the analysis with historical data coming to the conclusion that DCA is only beneficial under certain particular circumstances and that under many circumstances (such as under the conditions you give in your example), it is poor value. So basically the article largely supports your claim?

The scenario he uses to justify why he is a "strong believer" (as he refers to it) that DCA is a better strategy is so specific as to be pointless. How many people have more than 50% of their entire net worth in cash to invest in the stock market in one lumpsum? He makes no mention of costs either.

It's not as unusual as you'd think. Off the top of my head, I can think of people receiving an inheritance, a lump sum from property disposal, redundancy payment or a lump sum as part of their pension. These are also the kind of situations where people are likely to consider investing in shares.

The simple fact of the matter is that brokers push DCA because it is an easier sell to people who are worried about stock market volatility. However, they do not like to admit that it also offers comparatively poorer returns.

I've no doubt that brokers encourage people to invest in ways which may not be to the client's benefit. However that's a reason to be sceptical not to completely dismiss DCA. Brokers also encourage people to invest in stocks in the first place (for the brokers' self interest - earning commissions) but that's not a reason enough to claim that investing in stocks is a mugs game.

Think about it logically, the stock market offers the greatest returns of any asset class because it entails the greatest risk. By reducing your risk exposure through DCA, you also reduce your potential return.

I agree with you 100%! And I've learned something from you and charttrader that I hadn't thought about before but I still think the paper I linked to above gives a more balanced picture of the strategy than a blanket dismissal.

 

[charttrader]

Darag
As I already said, I have nothing against DCA - it's a practical solution for many people, albeit a flawed one. As for the article you cited, the author acknowledges that DCA is a costly affair and his conclusions aren't far away from what I have been saying.

I do have a problem with people who sell DCA as some kind kind of magic wand. Sure, you save a few quid in a bear market. Why not tell people that you will lose out the rest of the time?

Rory Gillen's assertion that the case outlined my myself and Room305 was "most probably plain incorrect" is actually quite breathtaking, not only for its ignorance but for its complacency. ''Most probably'' - I would expect an 'expert' in the business of selling stock market 'education' to base his teachings on facts rather than assumptions, especially when such assumptions were conclusively disproved decades ago.

He goes on to inform us lesser mortals of the "correct answer" before giving an example that "more effectively" demonstrates the point. Unfortunately, Rory's example does the opposite, obscuring the grim reality by cherry picking his time period.

Do the math Rory, and not just during a period of market under-performance. Check out some of the literature - it's basic stuff.

When you've done so, perhaps you will inform the people who fork out good money for your seminars that DCA is not the panacea that you have been making it out to be.

 

[CupofTea]

I think the best way to know what and when to invest is by educating yourself. Everyone seems to have an opinion so why not form your own by reading well respected works. I suggest anything by Benjamin Graham, Warren Buffet and also Common Stocks and Uncommon Profits by Phil Fisher. Many of these titles are old and quote US stocks so it's easy to understand the point and not get distracted by pre-conceived ideas you might have if shares you know are used as examples.

For a quick introduction to shares there is a lot of good common sense from the master himself, Warren Buffet, at www.berkshire-hathaway.com

 

[room305]

If reading through endless books doesn't appeal or the idea of shelling out €700 for Rory Gillen's rather questionable advice galls you, then here is a simple strategy for making money on the stock market.

Purchase the Dow Jones Industrial Average at the end of the last trading day of the year. Hold your position for 25 years and sell on the last day of the 25th year.

Measured over 82 separate periods of history, this strategy has yielded an average return of 14.17% before dividends.

That's pretty impressive. Read more about it here

 

[Remix]

I thought this guy raised an interesting point with regard to the Dow Jones 25 year test. In retrospect you can demonstrate that this strategy performed because you are using the benefit of hindsight to select the stock market of a country that emerged as world leader. But no one really knows what the next 25 years will bring for the USA:

..

Also, you are looking at one market, for the USA which happens to have become the world super power over the period of your sample. It is like saying, pick the country that is going to emerge as the world leader over the next 100 years, then invest in it's stock market. The hard part is picking the country IN ADVANCE. In retrospect, America is an easy bet. What would your results have been if you had selected Prussia?

 

[room305]

I thought this guy raised an interesting point with regard to the Dow Jones 25 year test. In retrospect you can demonstrate that this strategy performed because you are using the benefit of hindsight to select the stock market of a country that emerged as world leader. But no one really knows what the next 25 years will bring for the USA:

Admittedly if you think there is a risk that America will not exist twenty five years from now, this strategy may not be for you.

 

[Remix]

Admittedly if you think there is a risk that America will not exist twenty five years from now, this strategy may not be for you.

The original author wasn't at all defensive and had a reasonable response even if he didn't seem to fully answer the question.

He appeared to acknowledge the even if he did 'select' the dow with the benefit of hindsight, that the important fact is that it's tough to beat the buy and hold benchmark in that selection. Seems reasonable. But can't tell you much about its quality as a buy and hold strategy over the next 25 years.

 

[PubMan]

. But no one really knows what the next 25 years will bring for the USA:

If things swing around that much in the next 25 years that America's dominant position drops dramatically, I think you'll have much more pressing issues to worry about than your shares

 

[room305]

But can't tell you much about its quality as a buy and hold strategy over the next 25 years.

True. The DJ Wilshire 5000 might provide a broader index measure for the same strategy. The DJIA has only a limited number of companies and is not market cap weighted but it has been around a long, long time.

You could always hedge the strategy by putting a percentage of your portfolio into physical gold. This will provide insurance in the event of catastrophic financial upheaval.

 

[Remix]

If things swing around that much in the next 25 years that America's dominant position drops dramatically, I think you'll have much more pressing issues to worry about than your shares

Nah, don't be so scared, it'll be fun to learn how to write like this

激光, 這兩個字是什麼意思? 激光, 这两个字是什么意思?

 

[Purple]

Nah, don't be so scared, it'll be fun to learn how to write like this

激光, 這兩個字是什麼意思? 激光, 这两个字是什么意思?

AAM will have to support different text as well.

 

[joe sod]

I know the mantra is shares outperform everything in the long term, however 25 years is too long for most people, a third of a lifetime, not even warren buffet would be this patient, you really want to be looking at the 5 to 10 year time frame, when you look at that time frame , what shares will perform in that time frame, then asia, then energy, then agriculture appear. What are the stongest investments that can take advantage of this global trend and also what investments will suffer, thats what you want to be looking at.

 

[DirtyH2O]

DCA is represented here as a solution to market volatility yet there are academic studies showing that to outperform the market using this technique would require extraordinary timing and luck if it is even possible. If you feel that shares\funds have value at a point in time you should buy, if you don't then don't.
One example of this view is www.efmoody.com/planning/dollarcost.html
DCA probably suits a passive investor who doesn't do a lot of research but for an active investor it is not suitable, they should read,read and read again instead. You can't catch a falling knife but you should have prices that you would like to enter at otherwise what are you using to represent value?

 

[smiley]

i agree..for passive investor it seems the way to go but for those who do their homework and are more active, buying in at good value seems the best way to go....

 

[joe sod]

[broken link removed]

an excellent interview with marc faber in january, he basically predicted the february correction in detail, going into detail about the yen carry trade and how its unwinding would cause big ripples in world markets.

 

[room305]

i agree..for passive investor it seems the way to go but for those who do their homework and are more active, buying in at good value seems the best way to go....

Actually the best thing a passive investor could do is invest their money when they have it to invest, in the lowest cost, most widely diversified passive investment vehicle possible, in the most tax advantageous way possible and then forget about their investment for as long as possible.