Conference nyoss1::market_investing

You invest $12,000 into a fund on Jan 1.  By Dec 31st the fund has
gone down by 2%.  Guess what?  You have a 2% loss.

You invest $1,000 per month from Jan 1 to Dec 1 in the same fund.
Even though the fund has lost 2%, you might still actually have made
money.  The $1,000 you invested in say, May, might have been at a
fund price lower than other months.  The same might have happened in
August.  You could actually have made a good return even though the
fund did not.


Take your choice...

	Re. .0

	With DCA, you will buy more of the underlying entity when the price
	is low, and less when the price is high. Thus, the average cost over
	a period of time would be lower with DCA than with a scheme where 
	one bought fixed number of the entity periodically. 

	If the price of the entity eventually moves up, your returns with
	DCA would be higher. If the price does not move up, you are SOL
	anyway.

	E.g., I have been DCA'ing into 20th Century Ultra. The NAV of this
	fund was up in the 18's in early 1992. It fell as low as 14, and is
	now at 17+. If you had invested once early in 1992, you would have
	a made a loss. After DCA'ing, I've made a decent 12-13% over 1992. 

	Care to explain why this whole notion sounds crazy to you?

The whole notion may sound crazy if you've dollar-cost averaged DEC stock
the past 5 years... :-)

John Piekos

    Here's why I think the idea is ludicrous:
      
      Nothing can change the past. 
    
      At time T1 you buy entity A for $100. At time T2 entity A is
      $75. No matter how you slice it, at time T2 you've made a poor
      investment. Now according to the DCA theory, it's time to "average
      your loss" and buy some of entity A for $75.
    
      What makes entity A a better investment than any other entity
      at time T2?
                 

   Dollar Cost Averaging or any other thing cannot save you from dumb
   investing if you have not covered some basic ground rules already:

   -- The one, five and ten year records of the Mutual fund or stock
      show a consistently acceptable return. Higher ten year returns
      compared to five and one year ones, show you a bad investment.
      On the other hand, if you know that Peter Lynch (of the famous
      Fidelity Magellan fund) has become the fund's manager, these things
      may not matter. You can get into the fund anyway. 

   -- You need to be in it for the long haul, for mutual funds at least a 
      year to see the advantages. Short bursts of investing and selling
      only makes your brokers rich. So DCA works ONLY IF YOU HAVE CONFIDENCE
      IN THE STOCK OR MUTUAL FUND WILL PERFORM WELL IN THE LONG RUN.
      In fact some excellent fund families have designed their
      funds in such a way that you will be penalized if you are planning to
      get in and out of funds often.

   That said, if the above conditions are met, you dollar-cost average
   at 75$ for the second period with the confidence that this is a 
   temporary downward movement. If anything it gets you MORE shares for
   future appreciation. On the other hand, if the 75$ is invested in DEC
   shares, it may not be such a good investment :-).

   Also, DCA works much better if you time the initial investment also.
   Since this is usually a larger chunk of money compared to monthly ones
   you can keep watching the DOW and S&P charts in the business sections
    of your local newspaper. The best time to start a DCA program is
   when these charts have hit a bottom and are climbing up. Sep-Oct'92 was
   one such time period. I started a new DCA account with Vanguard Equity-Income
   at this time and my return so far in two months is 43%!!!

   Nari

    
    	Dollar Cost Averaging only works for stocks/funds that undergo the
    usual cyclical fluctuations and whose long-term trend is upwards and
    should be used only by someone who either lacks the time/interest or
    ability (me, usually :-( to correctly pick the valley's in the stock
    price.  Lets look at the three main phrases:
    
    1) "usual cyclical fluctuations"
    
    	Lets pretend that a stock is following a perfect sine wave
    fluctuation with a high of 30 and a low of 20.  The average stock
    price is 25.  If you are using DCA eventually you will be purchasing
    the stock at virtually very point in its cyclical fluctuation.  Since
    you're buying more shares at 20 than at 30, even though the *stock's*
    average price is 25, the average price that you've bought it at is
    lower.  This is the usual argument for DCA.
    
    2) "whose long-term trend is upwards"
    
    	As was pointed out a few replies ago, Dollar Cost Averaging into
    Digital stock over the last few years would not be a win.  If the
    long-term trend of the stock is downwards, buying more shares under any
    fancy label to justify the purchase ("DCA", "averaging down", "can't go
    lower than this", etc.) is turning good money into bad money.  DCA
    isn't a magic potion that turns a lousy stock into a great investment
    and thus just because you're "DCAing" it doesn't remove the burden you
    have of following the stock to see when its time to get out of it.
    
    3) "lacks the time/interest or ability to correctly pick the valley's
    in the stock price"
    
    	If the stock is a cyclical stock (regardless of long-term trend)
    *and* you have a good track record at picking when the stock has hit its
    valley, by all means don't use DCA -- buy the stock when it hits the
    valley and sell it when it hits the peak!
    
    
    	If you're in a case where all three of these characteristics are
    met, then DCA can, on average, give you a better return than just buying
    the stock at some random point in its cycle.  Another advantage of DCA
    is that if you do it via automatic transfers, its a long-term savings
    program that you don't have to consciously write the check to fund (and,
    of course, potentially write the check for a vacation instead...).
    
    	Like *everything* involved in investing, no idea or investment is
    right for everyone.  Actually, the act of us trying to convince you
    that DCA is not silly is *itself* silly if you understand how it works
    but don't see it as being useful to you.  :-)
    
    							-craig

    
    DCA is beneficial in investing since the market typically acts
    in cycles.  What DCA provides is a way to minimize your downside
    risk while improving your upside risk in most cases (the exception
    is with a stock that ALWAYS increases and never has a down cycle 8^).
    
    Look at it this way...let's assume you have $1200 to invest over
    a 6 month period.  The starting price is $10 and it decreases to
    $8 followed by an increase to $12.
    
       Price    1-Time Investment        Dollar Cost Averaging
       --------------------------------------------------------
        $10     $1200 (120 shares)         $200  (20.0 shares)
        $ 9       |                        $200  (22.2 shares)
        $ 8       |                        $200  (25.0 shares)
        $ 9       |                        $200  (22.2 shares)
        $10       |                        $200  (20.0 shares)
        $11       |                        $200  (18.2 shares)
        $12       |                          |
                  ---> $1440 (120 shares)    ---->  $1531  (127.6 shares)
    
    As you can see, you get more shares over time and therefore
    a higher dollar value.  Play with the numbers and see.
    
    Robert

    I understand all these arguments. I disagree with all of them.
    
    Why has nobody answered my question posed in .4?
    Let me try to put it another way. At time T2 no one
    can accurately predict the direction of any entity. If they could,
    they wouldn't be working for Digital.
    
    

    
    	Re: .8
    
    	I think we have answered your question in .4, but perhaps in a
    rather roundabout way.  At time T2, I'd have to ask myself "Why is this
    stock at $75?"  If the answer is that the whole market is at the bottom
    of a market cycle and it appears that the market -- and this company --
    is posed to recover then yes, buying more of the stock makes sense.
    If the market is doing great and this company has lost 25% of its value
    because of something fundamentally different about the company, then I
    wouldn't buy more of it.  (This is covered under the "what is your
    belief about the long-term trend?" part of the previous replies.)  Just
    because it is at $75 doesn't mean its a bad stock, just like it being
    at $75 doesn't guarantee that it will go back up.  Again, there is
    nothing magic in dollar cost averaging that removes you from having to
    keep a watchful eye on the company's future prospects.  If you think its 
    a good company but aren't good at market timing, then DCA is a decent way
    to go.  If you don't think its a sound company, then you shouldn't buy
    it for any reason.
    
    	I guess I'd sum it up by saying that the question of which company
    to invest in (or hold or continue to invest more in) should be separate
    from the question of _how_ to do the investing; lump sum or DCA.
    
    							-craig

    re .-1
    >>At time T2, I'd have to ask myself "Why is this
    >>stock at $75?"  If the answer is that the whole market is at the bottom
    >>of a market cycle and it appears that the market -- and this company --
    >>is posed to recover then yes, buying more of the stock makes sense.    
    
      My point is that at time T2 there will be many, many stocks
      that fit this criteria. Why not buy one of them?
    
    >>If the market is doing great and this company has lost 25% of its value
    >>because of something fundamentally different about the company, then I
    >>wouldn't buy more of it.  (This is covered under the "what is your
    >>belief about the long-term trend?" part of the previous replies.)  Just
    >>because it is at $75 doesn't mean its a bad stock, just like it being
    >>at $75 doesn't guarantee that it will go back up.  Again, there is
    >>nothing magic in dollar cost averaging that removes you from having to
    >>keep a watchful eye on the company's future prospects.  
    
    agreed.
    

    re: .8
    
    I don't see what the disagreement is here? It seems that you understand
    and agree with what everybody else said. In my opinion, the only thing
    is that DCA is effective and safe way of investing for "no-brainers". 
    (Excuse me for using that word. It's in NO way of being used in any bad
    taste.) It is a powerful tool for people who don't do market timing. If
    you think you can pick the peaks and bottoms of the market accurately.
    By all means, don't use DCA. But, if you feel like the rest of us who 
    can't accurately put their fingers on the pulse of the stock market and
    get burnt a few times by trying it. Then, DCA is the best method yet to
    be invented (IMHO).
    
    Mike

    There are two fundamental rules of investing (as opposed to
    speculating) in companies.  
    
    1) Invest only in well managed companies (kind of puts DEC in the
    specuation category for a while longer).
    
    2) Buy low, sell high. 
    
    If you believe that you are investing in a well managed company and if
    you understand the macro economic dynamics of the "stock market", then
    you recognize that the market price of the company will fluctuate due
    to conditions outside the influence of the company's management team.
    (This is not to be confused with the DEC-STD-EXCUSE for poor
    management.) Obviously, the ideal situation is one were you are able to
    recognize the bottom of a cycle/fluctuation and purchase stock at that
    time. This is know as "timing".  People who are "successful" in timing
    devote considerable time studying the company, it's industry, the
    market, macro-economics, etc.  Often, they publish newsletters that
    highlight success and downplay losses.
    
    The point is that it is incredibly difficult to predict the maximum
    peaks and valleys of any individual stock's price.  However, if you are
    determined to invest in any given company, you can take some advantage
    of rule #2 by investing like amounts periodically.  When you are buying
    during the negative cycle, your money buys more shares at a lower price
    than the same money buys at a higher price.
    
    As long as the slope of the overall trend line of the cycles is upward,
    you will realize a positive ROI. Go grab a Value Line chart of any
    company that has had an upward slope and see for yourself what your
    average investment and ROI would look like if you had done regular
    investing throughout all of the cycles in it's slope.
    
    Can you do better? Perhaps.  Can you do better without spending a lot
    of time manageing you investments?  Only if you are blessedly lucky.	
    Regular investing of like amounts is a proven modification of "buy and
    forget" investing.  
    
    It works.  Is it for you? That's your call.  Personally, I take the
    time to do the studying and find that I am successful timing buys in
    certain areas that I understand. But that's a hobby for me.
    
    Whatever your investment style, follow rules 1 & 2 and you will improve
    your net worth.
    
    As always, FWIW
    
    Dave

    
    	Re: .10
    
    >      My point is that at time T2 there will be many, many stocks
    >      that fit this criteria. Why not buy one of them?
    
    	Given the scenario that we've been discussing, unless I felt for
    some reason that this particular company would significantly outpace
    the overall market during the recovery, I'd probably go with investing
    in a fund.  DCAing into a fund has the same positive and negative
    attributes of DCAing into a specific stock.
    
    							-craig

I won't have all the money I want to invest this year until the paychecks
come...

HTH 

Murph

    
    DCA'ing with what happens to be a good stock will work.  Using it with
    what happens to be a bad stock can be disaster.  
    
    The critical question remaining is "how do you _pick_ a good vs bad
    stock?".  DCA'ing will not help you here.  And more importantly it will
    not help you when you're wrong.
    
    The investment philosophy of DCA'ing I think can lull the average Joe
    into clinging to a clearly bad investment, and then clinging harder by
    adding more funds.  From what I've read, the most common and repeated 
    error of the average investor is an unwillingness to admit that an
    investment is a bad one and taking one's losses before they become 
    too great to bear.  This problem is usually magnified by the 
    speculativeness of the type of investment (GM vs an OTC penny stock,
    for instance).
    
    The crux is to _pick_ well.  The second crux is to have a clear plan for
    getting out when what should have been a good stock for some unknown
    reason becomes a poor performer.  The times when you're right should
    then, relatively speaking, take care of themselves.
    
    - Phil
    

   If you think about it, investing and DCA'ng in Mutual Funds is very different
   from DCA with stocks. Diversification and stock picking is automatically
   achieved when you pick a good fund that has the same manager and/or
   the one,five and ten year performances are consistently good. If this is
   the case, the fund manager does the switching for you and the only downside
   risks you take are the ones due to cyclical variances (Not counting 
   sector funds or funds like Janus 20 that has a limited portfolio).
   In fact, these downsides are the ones that help you achieve better returns
   since you consistently buy when the prices are low.

   That theory aside, have you noticed that the low periods are only when
   the dates on which your automatic investment does not happen? :-)

   Nari

 

    
    re: -.1
    
    I agree that, if one is going to use DCA'ing, that going with a proven
    equity Mutual Fund is preferable to going it alone, esp. if one hasn't
    a personal stop loss plan when going it alone.  Most small investors
    it seems don't have a stop loss strategy, or when they do they don't
    stick to it (how many people have you heard say something like "I had
    planned to let stock XYZ go if it went down to 85, but decided I'd stay
    in for the long haul.  I now wish I'd sold. But it's so low now, it
    makes no sense to sell, so I'll wait till it comes back up to recover
    some of my losses...".  :-(
    
    - Phil
    

    
    re -.1
    
    	Stock XYZ = Stock DEC  
    
    	(but, maybe I'm being saved by the techno stock rush. Now
    	 I have another problem to deal with. I've already said,
    	"it can't get any lower" too many times. Now I have to
    	watch for, "it going to go MUCH higher. Hold. Hold. Ho...)
    

>    DCA'ing with what happens to be a good stock will work.  Using it with
>    what happens to be a bad stock can be disaster.  
    
      DCA  _ALWAYS_ guarantees that the average price per share that you
      pay is less than the average price of a share  during  the  period
      over which you DCA.�
      
      Even  if  the price trends down your average price will be less --
      which is to day that rather than a  "disaster"  you  will  have  a
      lesser loss than you might otherwise have had.
      
      There is no way, including DCA, to make money with a long position
      in a stock or fund with a price that decreases at a  rate  greater
      than any dividends it pays.
      
      ------------------------------------------------------------------
      � This assumes that the price of  the  stock  is  reasonably  well
      behaved.   It  is  possible  to  construct a wildly varying set of
      prices where the variation between your purchase is  always  lower
      than  the  prices  at the time of your purchase.  In this case the
      average price per share that  you  pay  could  be  more  than  the
      average price of a share during the period.

 
    re: .19

    >DCA  _ALWAYS_ guarantees that the average price per share that you
    >pay is less than the average price of a share  during  the  period
    >over which you DCA.�

    Yes, I've heard this argued before, and it's essentially true as 
    written.  No reflection on you Charlie, but frankly this tack reminds
    me of the salesman who convinces a prospect to buy something he doesn't
    need for $400.  Having slashed off $100 from the original $500 price to
    close the sale, the salesman has the customer walking home thinking
    he's just saved one hundred bucks today.  

    >Even  if  the price trends down your average price will be less --
    >which is to day that rather than a  "disaster"  you  will  have  a
    >lesser loss than you might otherwise have had.

    I disagree.  DCA'ing can certainly lead to disaster if blindly 
    followed to its (il)logical conclusion of buying more of a stock that
    is now causing you to lose significant money. I especially don't see
    how this can be seen as a credible strategy  with no disciplined stop
    loss plan.  And all discussions of DCA'ing I've seen have for all
    practical purposes been missing such a plan.

    DCA'ing doesn't have an investor ask himself "Hmm, it's down another
    10%, that makes it down 30% now. Maybe I ought to divert my remaining
    funds (invested and waiting to be invested via DCA) in another
    promising stock that right now is  behaving properly."   Instead,
    DCA'ing encourages the investor to commit even more uncommitted funds
    (not to mention time &  opportunity costs) to a stock that is
    screaming, "I'm Going Down AGAIN, Something's Wrong - DON'T BUY ME". 

    When the investor with DCA'ing ends up down (say) 50% rather than a
    theoretically possible 58% (or whatever), telling him that DCA'ing has
    "saved" him from losing more than he might have isn't likely to be a
    comfort.  Once you're down that low, theory won't fix the hole in your
    pocket.

    With DCA'ing it's simply too easy to end up like the hapless customer
    first described - essentially spending $400 to save $100.  
    
    - Phil
    

    Sounds like the real point here is that you can lose a lot more
    trying to pick stocks that using a mutual fund...  :^)

re: .20

>    >Even  if  the price trends down your average price will be less --
>    >which is to day that rather than a  "disaster"  you  will  have  a
>    >lesser loss than you might otherwise have had.
>
>    I disagree.  DCA'ing can certainly lead to disaster if blindly 
>    followed to its (il)logical conclusion...

      Disagree????   Well,  you're  right,  its  no  reflection on me if
      mathematics suddenly works differently! :-)

      But  actually,  I  think we DO agree.  DCA is no differnt than any
      other investing technique in that if it is followed blindly and to
      the  exclusion  of  any and all other information it can certainly
      lead to disaster.

    
    	Re: .22 and .20
    
    
>>    >Even  if  the price trends down your average price will be less --
>>    >which is to day that rather than a  "disaster"  you  will  have a
>>    >lesser loss than you might otherwise have had.
>>
>>    I disagree.  DCA'ing can certainly lead to disaster if blindly 
>>    followed to its (il)logical conclusion...
>
>     Disagree????   Well,  you're  right,  its  no  reflection on me if
>     mathematics suddenly works differently! :-)
    
    	Actually, if the price trends down DCA will mean that both your
    average share price will be lower _and_ that you will have a greater
    loss.  This seeming contradiction is due to the extra shares that you
    now have.  Lets say you have 100 shares of stock purchased at $50
    and the current price is $40.  You are sitting on a loss of $10 per
    share or $1000.  Lets say the stock continues to trend down and at your
    next DCA time, you buy 166 shares at $30 (still putting $5000 into it).
    The stock continues to trend down and is now at $20.  Lets see what
    happens with or without that second purchase:
    
    Scenario 1: Without the second purchase:
    
    	You own 100 shares bought at $50 and so you are sitting on a loss
    	of $30/share or $3,000.
    
    Scenario 2: With the second purchase:
    
    	You own a total of 266 shares at an average price of $37.59 and so
    	you are sitting on a loss of $17.59/share (which is lower than
    	scenario #1's per share loss) but you have a total loss of $4,680
    	(which is greater than scenario #1's total loss).
    
    Basically, if the trend of the stock is continually down, the per-share
    loss is a meaningless number -- the more you buy on the way down, the
    faster you are losing money since you own more shares.
    
    							-craig

  Re.20

 >>>
I disagree.  DCA'ing can certainly lead to disaster if blindly 
    followed to its (il)logical conclusion of buying more of a stock that
    is now causing you to lose significant money. I especially don't see
    how this can be seen as a credible strategy  with no disciplined stop
    loss plan.  And all discussions of DCA'ing I've seen have for all
    practical purposes been missing such a plan.
 >>>

   Actually, it's all there in this note. You just have to look really 
   hard. :-)

   Seriously, choosing a mutual fund is a mini-stop-loss plan (because
   your stop loss agent is your fund manager instead of your own brain and
   you are investing in his ability to switch the stocks before making
   bad losses). 

   Choosing a good fund with a good manager with consistent performance
   is your really good stop loss plan, because his returns tell you that
   he was successful in stopping losses for about ten years in the best case

   If you want an iron-clad stop loss plan, try the old shoebox. :-)

  Nari

 
    re: .22 

      >Even  if  the price trends down your average price will be less --
      >which is to day that rather than a  "disaster"  you  will  have  a
      >lesser loss than you might otherwise have had.
 
  > > I disagree.  DCA'ing can certainly lead to disaster if blindly 
  > > followed to its (il)logical conclusion...

> > > Disagree????   Well,  you're  right,  its  no  reflection on me if
> > > mathematics suddenly works differently! :-)
    
      It was the "rather than a disater" that I disagreed with.

      >But  actually,  I  think we DO agree.  DCA is no differnt than any
      >other investing technique in that if it is followed blindly and to
      >the  exclusion  of  any and all other information it can certainly
      >lead to disaster.
    
      Right. We can agree on that.
    
 
    re: .23    
    
    >Actually, if the price trends down DCA will mean that both your
    >average share price will be lower _and_ that you will have a greater
    >loss.  
    
    This is also true, but I was giving the benefit of the doubt to the
    "pro-DCA" position that one would have invested a fixed amount in
    the stock over a fixed time, either up front with it all, or in 
    a timed fashion with DCA'ing.  Here DCA'ing will save you in per share
    losses as well as total losses as follows (assume 1 year window):
    
    Scenario 1 (non-DCA): 
    	
    	- Jan 1 invest $5000.
    	- one year later you're down $500 or 10%
    
    Scenario 2: (DCA):
    
    	- Jan 1 invest $2500.
    	- 6 months later your stock is down 5% from Jan 1: you're down
          $125, and now you invest the other $2500
        - at year end, the stock is down another 5% from Jan 1 price, so 
          you're down for this 6 months on $2375 and 5% on $2500, which
          comes out to a total loss of 368.75 or 7.3% .
    
    Now a loss of 7.3% vs 10% might sound pretty good to some, but ->
    
    	- the added transaction costs (2 for DCA, 1 for the other) would 
          make for bigger overall transactions cost using the DCA method 
    	- the smaller principal traded on each DCA trade would have a  
          higher percent of principal cost each time using DCA, adding
          even more to the cost of trading twice (the less you buy, usually 
          the more expensive it is to buy it)
    	- Dividends earned, if any, would be lower using DCA as you hold 
          fewer shares for shorter periods
    
    Factor these in, and the spread between the two losses becomes smaller.
    
    Now also factor in "real life" where most people don't have the total
    principal waiting in the wings but instead commit more funds as they
    become available for DCA'ing (your examples Craig), and you have a
    method that, except for the most disciplined investor, can become a
    road to financial disaster without any stop loss plan.
    
    So, in my opinion, DCA'ing isn't what's it's cracked up to be.  But if
    it doesn't help much on the loss side, how about on the gain side?
    Nope, because when you _do_ have a winner, DCA'ing makes sure that
    you don't fully participate in the up move.
    
    As -.1 said, if one must DCA, then a proven Mutual Fund is probably the
    best way to go.
    
    - Phil
    

re: .25

>              ... when you _do_ have a winner, DCA'ing makes sure that
>    you don't fully participate in the up move.

      No  one in their right mind and very few people in this conference
      would claim that DCA'ing is theoretically  superior  to  correctly
      identifying lows and highs, and buying and selling accordingly. 
      
      If  you  can make such identifications with consistent correctness
      then everyone in their right mind and most of the people  in  this
      conference will be very favorably impressed, indeed.
      
      On  the  other  hand,  mere  mortals  who have an income stream to
      invest can use DCA very effectively. 

>      On  the  other  hand,  mere  mortals  who have an income stream to
>      invest can use DCA very effectively. 

    Not to quarrel, Charlie, but I start to get concerned when the commonly
    accepted wisdom is that the market is THE place to be.  Usually this
    happens when the market is near a major top.  This file is starting to
    see more and more activity as is typical of the public participation that
    always accompanies market tops.  Plus the huge increase in stock and
    bond offerings, as well as more speculative nature of today's market
    (NASDAQ has rallied the equivalent of 700 DOW points since its Oct92 low)
    all combbine to signal "Warning!  Steep grade ahead!"
    
    In August 1994 as the DOW falls to new lows under 2000, historians will
    look back at the present and proclaim how obvious it was that the
    market was too frothy and due for a major pullback.  And those who have
    been faithfully DCA'ing will be complaining bitterly, just as those who
    have been holding on to their ESPP shares for 10 years.
    
      John

    
    >On  the  other  hand,  mere  mortals  who have an income stream to
    >invest can use DCA very effectively. 
    
    Well this is one mere mortal that will avoid DCA'ing. :^)
    
    - Phil
    

>     Not to quarrel, Charlie, but I start to get concerned when the commonly
>     accepted wisdom is that the market is THE place to be.  Usually this
>     happens when the market is near a major top.  This file is starting to
>     see more and more activity as is typical of the public participation that
>     always accompanies market tops.  Plus the huge increase in stock and
>     bond offerings, as well as more speculative nature of today's market
>     (NASDAQ has rallied the equivalent of 700 DOW points since its Oct92 low)
>     all combbine to signal "Warning!  Steep grade ahead!"

Marketing timing has two risks: the risk of being out of the market at
the wrong time (eg.  1991 when the SP500 went up by 30%) and the risk of
being in the market at the wrong time (10/87).  For these reasons, some
of us mere mortals take a more balanced approach and have a portfolio
consisting of stocks (with miminal exposure to DEC stock), bonds, and
cash with allocations selected based a personal tolerance for risk.

Gim

I am also a mere mortal, and agree with balance and diversification, with a eye
on Fundamentals.  I don't market time, and probally never will.  I achieve 
diversification through mutual funds, and I balance my assests by changing my
allocations from time to time (usually when my stock funds are making good gains)
I treat my DEC stock as an investment (with no thoughts of company loyalty).  My
biggest holding is CGM Capital Development Fund.  The fund's manager Ken Heebner
used to try and time the market (often pulling back to 100% cash), now he has
changed that philosophy.  He NEVER times.....he relies on fundamentals.  If there
is another correction (and there will be one), or if the market is frothy, or any
of the other buzz words of the industry, than so be it.  When the market crashed
in 87 stocks took a dump, but the companies CGM was in were fundamentally sound,
and came back up to the proper value.  This just created an opportunity (I 
personally dumped more cash into the market right after the crash, it came from
my bond funds because my allocations were then out of wack).  If I were older 
than 33 I might feel different, but of course if I were older my exposure to 
stock funds would be different too.....back to the main topic DCA...it's an
industry buzz word, but DIVERSIFICATION, ALLOCATION, and FUNDAMENTALS are the
key!

michael

      For  the  record,  .2's comments about people in their right minds
      and meer mortlas was intended to be taken with a smiley face  :-)
      If anyone took it otherwise, I appolgize for not doing an explicit
      SET SMILEY FACE ON.
      
      RE: .27
      
      John,  not  only  do  we  not  have  a quarrel, but I an in fairly
      violent agreement with you.  I think that the risks in the current
      market   warrent   caution   and  my  portfolio  has  reflected  a
      conservation of capital emphasis for some time.  I  eagerly  await
      the  buying  opportinities that will follow shorty after those new
      market lows you predict.
      
      In  otherwords, my defense of DCA applies to its being a good tool
      when usee at the right times and in the  right  circumstances  for
      the  individual  investor.   I  know  of  no technique that can be
      blindly followed with success all the time.

    
    The comments on diversification for safety, if safety rather than
    aggressive growth is the goal, I also agree with.  Like investing in
    strong mutual funds or using disciplined stops, using this in combination 
    with DCA'ing will I think lessen its inherent risks.  Nevertheless, 
    I wouldn't recommend DCA'ing (but heck, I had a bad year in '92 without
    it [albeit preceded by two great years], so I definitely don't profess
    to have all the answers).  Hats off to anyone using it with success. :^)
    
    - Phil
    

    I guess I still maintain my position from .0
    
    It seems to me, that if you believe in the DCA model, you can make
    a lot more money buying on every downtick of a stock or fund. Or
    increasing the size of your investment every time the stock/fund
    goes down.
    
    I also strongly disagree with those that seem to think DCAing is
    the opposite of market timing. DCAing is the opposite of market
    timing for those of you making a blind investment each month. But
    we all seem to be agreed that that's now way to invest. For
    those of you evaluating the investment each month, well, you're 
    just timing the market, right?       

I have been known to scrape some extra cash together when CGM Capital Development
goes on a mini-slide.  Because the trend has always been up, even through 1987 (I
was still up 12% for the year, correction or no correction).  I didn't mean to
suggest that DCAing is the opposite of market timing, I guess I just don't 
believe in the pure concept of market timing.  Monitoring my investments is just
a way to check my allocations.  I am a firm believer of an allocation based on
age, net worth, current income level, and risk tolerance.  In 1991 my allocation
was way out of wack, in January 1991 I had 78% committed to the stocks (I had 
just turned 31, and had a reasonable net worth, good current income).  In 
December of 1991 I had 87% in stock (CGM returned 99.1%).  Based on my new net
worth I adjusted the portfolio to 68% stock (higher net worth reduced my exposure
to stock).  This monitoring and adjustment had nothing to do with market timing,
just a strong commitment to early retirement, and education for my daughters, and
some really great vacations every few years.

Talk about market tops, and frothy, and IPO's and all the other industry buzz
words sell a lot of books.  DCAing is just another industry buzz word...it works
great for people who don't have the dicipline to pay themselves first....is it
the answer to successful investing, no....pick a good fund, read everything you
can get your hands on, stick with it, and don't worry about crashes (a good fund
will protect you, this doesn't mean that the fund won't go down with the market,
it just means good funds will float back to the top).

michael

;-)  sorry if my tone was incorrectly portrayed by the text, nothing can 
substitute for conversation (at least for me).

    Many mutual funds offer automatic investment plans where they withdraw
    a set amount from your bank account on the same day of every month,
    simplifying dollar cost averaging.  Some only allow one or two choices
    for the day (lie the 5th or the 20th), while others allow you to choose
    any day.  Has anyone ever heard of any studies done that show the best
    day of the month to have this done?  That is, since you want to buy low,
    is there any pattern that on certain days of the month the general trend
    is for stock prices to be lower?

    thanks,
    -dave

    Good question.
    
    There is an investing paradigm called Seasonality that invests on
    certain days based on their having been good days historically on which
    to commit funds.
    
    I can't recall all the details, but either near month-end or the 
    beginning of a month was one of the times.  The others have to do with
    weekends and holidays, I think.  If I can find more info among my
    clutter I'll post it...there may be a book or two.  Some of the
    reasoning made sense to me, so I tried it a few years ago.  The fund
    I was in was a general equity fund, and after several months is was
    lower than when I started, so I dropped out.  There were a few funds
    that actually did periodic switching for you if you chose the
    Seasonality option.
    
    Stan

    The 20th is not bad, but the 26th of the month is the best single day,
    by date, according to my studies. I was specifically looking for the 
    date of month the market is lowest on average (1978-1994.25).
    
    Yale Hirsch publishes something called the _Stock Trader's Almanac_, 
    or something like that. He's done a lot of studies along those lines 
    (best day of week, best month of year, etc.).
    
      John

    I couldn't find the articles I once had that described the algorithm
    that can be used to determine the best days during which to be
    invested, Seasonality-wise, but the Mutual Fund Forecaster seems to 
    carry articles about the specifics.  
    
    They may be able to send more info, or give other references.  I used
    to get complimentary copies of their newsletter pretty regularly.
    
    They're at 800/442-9000,
    
    Stan

>    I couldn't find the articles I once had that described the algorithm
>    that can be used to determine the best days during which to be
>    invested, Seasonality-wise, but the Mutual Fund Forecaster seems to 
>    carry articles about the specifics.  
    
    It's in _Stock Market Logic_ by Norman Fosback (who also does the
    aforementioned Mutual Fund Forecaster), but it's not what .0 was 
    asking about. The trading rules are as follows:
    
    1. Be invested the last trading day of every month and the first four
       trading days of the following month.
    
    2. Be invested the two trading days prior to a holiday when the market
       is closed.
    
    3. (Recent addition) If the first or last day of #1 above is Monday,
       or the first day of #2 is Monday, do not be in the market that day. 
       I.e., stay out an extra day or get out a day early.
    
    I believe Rydex still runs a Seasonality program whereby they will
    automatically switch you into and out of a no-load S&P500 index fund on
    the correct dates. They're located in Washington D.C., 800-820-0888 or
    301-652-4402.
    
      John

        Here is an alternative to dollar-cost-averaging that I feel
much more comfortable with.  It's a value-based approach.

        First, open an account with a couple of funds that have a
good track record that you are comfortable with.  It also helps if
these funds are diverse.  For my example, I'll use four: Aggressive
Growth, Growth and Income, International Stock, and Bond.

        Next, determine how much you would like to invest each month.
For my example, I'll say $400 since it's a nice round number.  (All
mutual funds have a minimum contribution amount, so make sure the
monthly amount is above this minimum.)  I am using a frequency of a
month, but this could certainly be done with $100/week, or
$200/two-weeks.
                                                                                        Determine what percentage of your portfolio should consist
of each of your funds.  I've read several advisors who say the
international component should be below 20%, and some say 15% due to
the additional risk.  For my example, here's one way to slice it:

        AggrGro 40%
        GroInc  30%
        Inter   15%
        Bond    15%

        Each month, check the current NAV for each of the funds.
Multiply the number of shares currently held by the current price
to give you the total market value of your holdings.  Then, calculate
the current percentages that each fund represents in your portfolio.
The fund which is the greatest percentage below your target percentage
is where you should send your money that month.
                                                                                Here is what a perfectly balanced spreadsheet would look like one month..

 Fund  Shares   NAV     Value  Target%  Actual%  Off%
 Aggr  250      16.00   4000   40        40       0
 GI    190      15.78   3000   30        30       0
 Int   100      15.00   1500   15        15       0
 Bnd   125      12.00   1500   15        15       0

            ttl value: 10000

(when this happens, just contribute to your favorite one)
Then, after a few contributions and a few dividends, it may look
like this:
                                                                                
 Fund  Shares   NAV     Value  Target%  Actual%  Off%
 Aggr  275      16.25   4469   40        40.8     0.8
 GI    210      16.00   3369   30        30.8     0.8
 Int   110      14.77   1625   15        14.8    -0.2
 Bnd   135      11.00   1485   15        13.6    -1.4

            ttl value: 10948

This month, the money should go into the bond fund because it is
the one undervalued in comparison to the other funds.

        I did a comparison of this method with DCA and found that when
prices are relatively stable, the two methods yield the same result.
But, the more volitile the prices are, and the more overall growth
experienced, the better this method is.
                                                                                        There is a risk inherent in this method: picking a lemon.
Remember I said to pick a fund with good prospects of growth?  Well,
if one of the funds continually looses value, this method will have
you throwing more and more money into it.  But, if you really believe
that the fund is well-run and will head back up, then you are getting
a better and better bargain each time you buy.  (if it's a lemon,
DCA won't prevent losses, but the amount would be different.)

        One minor weakness is the lag time between the decision and
the contribution.  Yes, it takes a few days for the mail to travel,
and prices could change in the meantime, but, I think this beats
guessing.

        One big benefit of this is that it forces you to remain
aware of how the fund is performing.  DCA can lead to carelessness
because there's no *need* to check on the current price.  This
method requires an examination of the portfolio on a regular basis.
                                                                                        I am interested in your comments/critiques of this method.
If there's a better way, I would like to know it!

-Austin

    
    re: if there's a better way
    
    	that is a good way.  a somewhat better way is to determine the 
    	portfolio weights using a less ad hoc method.
    
        the method requires that each fund has a price history that
    	extends back through at least a full business cycle, and that
    	the philosophy of each fund hasn't changed during that time.
    
    	the method is essentially a numerical procedure that assumes that
    	the covariance matrix of returns is stable through time, and that
    	you can estimate expected return with some accuracy.  Historical
    	returns are not necessarily good estimators of future return, and
    	that is the weakest link in the procedure.
    
    	but given the covariance matrix and the expected returns, you can
        numerically find the security weighting that minimizes portfolio
        variance.  there are LOTUS spreadsheets and application programs
        that can do this for you.
    
        As your return estimates change over time, you can use this same
        procedure to change your weighting factors accordingly. 
    	Interestingly you can use this procedure to identify the minimum
    	risk portfolio for any desired level of return, though you probably
        won't like what an expected return of 30%/year looks like, since
        it will entail borrowing money or selling short to finance an
        investment in other securities with higher expected return.
    
        /jim
     

    DCA basically has you making a constant dollar investment periodically.
    
    What is the 'inverse' strategy for selling stock? Does selling a constant 
    number of shares periodically maximize the gain vs the average sale price?
    
    Dave

    Dave,
    
    It would seem that way, wouldn't it?  You're basically "buying"
    one security (U.S. dollars) with another (shares of stock).
    If DCA works in one direction, symmetry demands that it work in
    the other.
    
    -Jerry

> It would seem that way, wouldn't it?  You're basically "buying"
> one security (U.S. dollars) with another (shares of stock).
> If DCA works in one direction, symmetry demands that it work in the other.

	Yup, the analysts often recommend taking "some" of the money
	off a table for specific stocks when they feel the stock has
	had a nice run-up and you want to protect some of those profits.

	My personal experience isn't so positive.  I had DCA while ATC
	was on it's way down.  Then on it's way back up I was selling
	20% of my shares at a time to "average".  I only got as far as
	selling off 40% of the shares (for a small profit) before the
	price started back down again.  I ended up selling at year end
	the remaining 60% and it ended up being my biggest loser of the
	year eating up about 22% of my realized gains.

	Earlier in the year I had also price averaged while selling USair
	(which I had also DCA while it was on it's way down after the
	plane crashed) and selling it that way I did end up selling each
	chunk (two chunks of 25% and remaining 50% in one chunk) for
	successivly bigger profits.  In this case however I shouldn't of
	sold *any* of it, or at least kept one chunk.  Because on this stock
	the runup didn't stop after I sold everything.  The price peaked
	much higher (if I sold at peak I would of had an extra $30k in
	profit, and even at todays price it would be an extra $25k!!!!).

> If DCA works in one direction, symmetry demands that it work in the other.

There are at least 2 reasons that DCA is a good thing.
1) It encourages (requires in most cases) regular saving.

2) If the price fluctuates your average cost per share is *less* than the
    average price. (Because your constant dollars buy more shares at lower
    prices and fewer shares at the higher prices).  A simple example will
    illustrate this point:

       Invest $1000 in a fund at $9 per share, followed by $1000 at $11 per
       share. (or in the opposite order)
              1st purchase buys 111.111 shares
              2nd purchase buys  90.909 shares
                                _______
              Total shares      202.020 shares  which cost $2000 total
              Your average cost per share:         $9.90
              Average share price  ($9 + $11)/2:  $10.00


Now the proposal is that the inverse of DCA for selling ought to work to your
advantage for selling if you sell constant number of *shares*.  Let's examine
if that stratagy works for a similiar example to the one for buying.

        Sell 101.01 shares at $9 per share, followed by 101.01 shares at $11 per
        share. (or the opposite order)
               1st sale grosses  $909.09
               2nd sale grosses $1111.11
                                 _______
               Total proceeds   $2020.20  for the sale of 202.020 shares
               Your average sale price per share:    $10.00
               Average share price  ($9 + $11)/2:    $10.00

In other words, the inverse as proposed did *not* work.  In order to work, you
would need to sell *more* shares at the higher price and *fewer* at the
lower price (Then your average sale price per share would exceed the average
share price).

*****************************************************************************

Indeed there *is* an inverse for DCA that many people use, but *not* to their
advantage.  Once you retire and want income from your investments, it is
natural to withdraw a constant *dollar* amount per month (or quarter).
Unfortunately, this results in selling more shares when the price is low,
and selling fewer shares when the price is high.  The result of this
stratagy is an average sale price per share *lower* than the average share
price. (Just the opposite from what you want).

Don

    Re .44                              
    
    Jeff,
    
    Sorry you didn't make more on USAir's runup.
    In the future, you might want to use trailing stops
    to protect your gains.  See Chapter 13 in Martin Zweig's
    "Winning on Wall Street" for a discussion.
    
    -Jerry
    

    I gave this some more thought the other day; forgot I posted the
    question... I realized, as .45 says, that selling a constant number
    of shares doesn't do it. However, here's one I think would...
    
    Let's say you have $12K in shares and you want to disinvest over a year.
    Take your share price on day 0, and say double it. On a monthly basis, 
    take the difference between this and the current price and divide it
    into $1K, and sell that number of shares. When the price goes above the
    day 0 price you sell more, when it drops below you sell less. 
    
    Comments?
    	Dave

    Say on day 0 I have 200 DEC at 60, i.e., $12000 to disinvest.
    
>    Take your share price on day 0, and say double it. On a monthly basis, 
>    take the difference between this and the current price and divide it
>    into $1K, and sell that number of shares. When the price goes above the
>    day 0 price you sell more, when it drops below you sell less. 
    
    End of January, DEC is at 50: 120-50=70. $1000/70=14 shares.
    
         If instead DEC is at 70: 120-70=50. $1000/50=20 shares.
    
    You meet the goal of selling more when the price is higher.
    
    However, it's not clear how you budget this over a year's time.
    (Not clear how important that is, either). If DEC stays at 70,
    you'd run out of stock to sell in October whereas if DEC stays
    at 50 you'd have shares left over at the end of the year. Is there
    some sort of iterative re-balancing that needs to be done each month?
    
    Where did the rule for doubling the price come from? If you were to
    triple instead of double, you'd sell much less, and conversely.
    I suspect there's a hidden relationship between the volatility of the
    stock and the right multiplication factor, but doubling seems to
    work out pretty close in any event. Unless the STOCK doubles, in
    which case you'd sell 0 shares, or maybe be forced to buy if you
    consider selling a negative number of shares the same as buying.
    (Gee, maybe that's why Netscape shot the moon -- a bunch of program
    trades that didn't check for negative sell and issued buy orders! :-)
    
      John

> In the future, you might want to use trailing stops
> to protect your gains.

	You mean stop-loss sell orders? (ie. orders that become market orders
	when the last trade price goes below some set price)

	Well there is another reason for reducing one's position in a
	stock after a run-up.  If you think the stock has finished it's
	short-term run-up, reducing one's position frees up some cash
	to invest in something else (only a limited supply of capital
	to invest :-)

> See Chapter 13 in Martin Zweig's
> "Winning on Wall Street" for a discussion.

	Martin is "Marty", one of the regulars on W$W, isn't he?

>>    Where did the rule for doubling the price come from? If you were to
>>    triple instead of double, you'd sell much less, and conversely.
>>    I suspect there's a hidden relationship between the volatility of the
>>    stock and the right multiplication factor, but doubling seems to
>>    work out pretty close in any event.    
    
    Doubling just "felt right" based upon the desired mathematical behaviour.
    
>>    					Unless the STOCK doubles, in
>>    which case you'd sell 0 shares, or maybe be forced to buy if you
>>    consider selling a negative number of shares the same as buying.
    
    If it doubles. you sell 120-120=0, $1000/0 = all your shares
    
    Hitting the limit gives the same mathematical problem as hitting zero
    on the buying side; how many shares will $10 buy at $0/share?
    
    I suspect there is a 'better' algorithm, it was my first pass...
    
    Dave

    Re .49
    
    Jeff,
    
    Yeah, Zweig shows up on WSW every so often.
    
    Jerry