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Greg S | Is dollar cost averaging an approach that works well in a bear market? |
Is the any adjustment that one should make to this approach in a bear market?
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My timeline is still 35 years, so my goals are relatively long term. |
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D
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To echo the other comments the answer is yes and no. As with many things it is dependent on your circumstances.
If a stock, bond, fund, etc. is a dog which has been depreciating in value for several years then all you are doing is buying cheaper and cheaper shares of a security which is being devalued more and more. There is a point in time where you need to exit that position because bottom line the security is falling.
Since you are a long term position holder there are two strategies I would suggest given a falling security:
1) Stop contributing to it. Hold your position and invest elsewhere that way you benefited somewhat from the cheaper prices but did not sell at a loss. If it is a fund with a minimum monthly investment requirement, only contribute the minimum amount.
2) Sell at a loss. This always sucks but you cannot get emotionally attached to a security.
A bear market is kind of relative as well because an investor is positioned in a certain number of sectors/industries which may be doing well while the Dow for example is not. There is of course short selling and options which are vehicles that can make you money in a bear market but those are not for beginners.
If you are confident in your securities ability to recover and/or have high risk tolerance then dollar cost averaging is always a good idea. However if that security has been steadily falling then exit (e.g. with either stragegy above if you want), the cheaper shares are falling and may not recover and you will end up with many useless shares.
My $0.02 |
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Thin Kaboudit
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Dollar-cost averaging works well in ALL markets, and if you run some "pretend" scenarios yourself using Excel, you'll find that it is an autopilot method that gives an overall higher return than almost any other method of buying sound stocks. The reason it works so well it that it takes the natural emotion out of stock-buying decisions. |
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mukwonago53149
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Yes and No - it depends on your investment time horizon as well as the stocks you are picking.
If you have a short-term investment horizon (0-3 years), this is a bad idea because you never know when the stocks are going to stop falling and reverse. However, history has shown that in the long run (3+ years), stocks go up. So if that describes your investment objectives, buying in bear markets is a good idea.
Make sure you are buying high quality, blue chip companies that have almost no chance of going bankrupt. If you're buying stock in small dinky companies in the bear market, they might go bankrupt and/or never have their stock price recover. You can only dollar cost average the stocks of large, established companies (think McDonalds, Coca-Cola, Walmart, GE, Disney, etc). |
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Mista Ricksta
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Some SAGE advice when it came to DCAing is to set a LIMIT.
One, two, three, maybe FIVE blocks of stocks. You can use a limit of TEN blocks if you are REALLY affluent. The decision is your own. Purchase these actively. Once you reach this limit, you can redirect your money to another target and let the former one DRiP if that is available to you.
The RISK that you face with this tactic, however, is resembling the S&P 500 too much. So, this is a risk you take, but, all-in-all, it's not a BAD risk to take. |
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piet lul
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extremely well. |
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BigBen
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to me, it is better for you to use value cost averaging techniques. meaning, you buy more if the stock price drop. this will bring more value to your money.
however, this only works on high quality stocks. picking the wrong stock and buy more during bear market can bring disaster. these might help you to choose one:
Good Stock Pick for Unlimited Profits Framework
http://www.stock-investment-made-easy.com/good-stock-pick.html
How to Find Good Stocks That Will Survive 2008 Market Crash
http://www.stock-investment-made-easy.com/how-to-find-good-stocks-that-can-survive-2008-market-crash.html
How to Pick Good Stocks That Can Make You Rich in The Long Run
http://ezinearticles.com/?How-to-Pick-Good-Stocks-That-Can-Make-You-Rich-in-The-Long-Run&id=864890 |
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src50
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It definitely works well, especially for retirement investing. |
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Dr Jim
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Yes, long-term the market is expected to go up. Just be sure to rebalance your portfolio at the end of the year so that you take profits from your top performers and add to the laggards. Eventually, the laggards will be your top performers and that is why it works out.
If you can, go to your local coin store and invest a portion in Gold and Silver bullion. Those two will perform well until the public has driven the price up parabolically (irrationally), much like that of the Nasdaq in 1998-2000. It will outperform for various reasons: inflation, poor performing US dollar, US dollar is no longer to world's currency, trade deficit and fiscal irresponsibility, stagnate economy, housing and credit problems, etc. |
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Kiker
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this works well when the stock is on a bear cycle, not when the market is.
reason being is just because we are in a bear market, does not mean there is a bull run somewhere. you could even be in a sector that is on a bull run but a particular stock is on a bear run...you could do the DCA there as well.
the DCA approach merely reduces your risks associated with traditionally investing, as you are not putting a large amount at the wrong time.
hope this helped. |
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emankcin
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If you have a lump sum to invest, why would you buy today what you think will be down in two weeks (or whatever your DCA schedule is)?
If your time horizon is 30 years and you have a stock at a price that you like, buy it now. If you think it will be down in a month, buy it in a month. If you think it will be up in a month, why would you wait to buy it a month later?
For most people, DCA isn't an investment strategy, it's a cash flow reality. They have $50 going into their 401(k) every two weeks because that is when the cash is available. |
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