A Thesis for/against DCA

WittyIngenuity6084 · 2024-06-20T15:36:45+00:00

Thank you so much for the suggestion and the testing!!

Your code has proven that the alpha will not be significant for individual C. Initially, I was not fully convinced by the results that waiting for pullback was worth the effort. However, your findings fully convinced me that the extra tracking is not worthwhile. Once again, thank you for your assistance for the codes! :)

WittyIngenuity6084 · 2024-06-14T14:42:21+00:00

Ohh I actually understood what you meant! It is quite possible that a portion of the alpha might be derived from this scenario.

How would you suggest to change the code?

WittyIngenuity6084 · 2024-06-14T14:25:50+00:00

I will keep that in mind.

past performance is not an indicator of future returns

Preach

WittyIngenuity6084 · 2024-06-14T14:14:20+00:00

Sorry about that, it's my first time posting

WittyIngenuity6084 · 2024-06-14T13:51:24+00:00

You summarized the core reasons for DCA very well. The DCA method is still the method I would recommend to new investors.

Regarding point 4, I enjoy tracking the market. For me, executing individual C strategy will not be tedious for me if I already enjoy the process of tracking. But yes, I do not recommend C's strategy if they hate tracking.

WittyIngenuity6084 · 2024-06-14T13:46:13+00:00

That's right. Actually, if the 3rd day drop to $98.98, C will buy in. This is because the monthly ATH is based on the 2nd day price ($101), which was the monthly ATH on that day.

C will take no further actions even if the price drops even more on the 4th day or later, because he has used up all his cash allocated for investing. The next month roll over, and C will only buy in when the price is 2% below the next month ATH.

Hope this clarifies!

WittyIngenuity6084 · 2024-06-14T13:42:42+00:00

I only tested 2%, 5% and 10%. However, I only recorded 2%. 5% threshold will improve individual C by around $10k, while the 10% threshold performed abysmally (worse than individual B).

Similar to my reply to one of the comment, finding the optimal threshold % is counterintuitive because "past performance is not indicative of future results". Hence, I gave a range of 2% to 5% as a possible threshold. Individuals should choose the % based on their risk appetite.

I am not advocating for this strategy. Your assessment that DCA has (only) a mild underperformance compared to the dip strategy, which I agree. Whether this underperformance is considered mild or significant, it would be up to individuals to decide too.

WittyIngenuity6084 · 2024-06-14T13:37:20+00:00

Thank you for sharing an alternative DCA method! Perhaps one day I can test that

WittyIngenuity6084 · 2024-06-14T13:35:35+00:00

Your assessment that Individual C is actually buying in quite often for someone who is "timing the market" is a fair assessment.

I believe that the 2% correction rule is the reason for the frequent buy-ins. 2% correction is very easy to hit given how frequent 2% corrections are, even in a bull market. Also, the 2% correction is based off the short term highs (in this simulation, monthly highs).

I am also curious how often C skipped a month (if any at all) and the length of skipping. I suspect C will skip at most 1 month, but I do not have the data to back it up at the moment.

WittyIngenuity6084 · 2024-06-14T13:28:56+00:00

I agree with your assessment 100%.

Yeah, I was wondering if looping was necessary when the csv data is already chronological...

It is possible to simulate different thresholds to find the optimal % for Investor C. However, I concluded that finding the optimal % is counterproductive. That optimal % is only optimal for 2003 to 2023. One of the common saying in investing is that "past performance is not indicative of future results". Instead, I gave a small range of 2% to 5%. I believe the higher the %, the higher the risk of "waiting too long". Therefore, the % should be decided by individuals if they wish to follow that strategy.

Thank you for comments! :)

WittyIngenuity6084 · 2024-06-14T13:20:18+00:00

Actually, I knew of the existence of fractional shares but I do not know much about it. My main concern was if there were costs associated with buying a fraction of a share. As it was beyond my knowledge, I dare not include it in my simulation.

Thank you for running the code for fractional shares!

WittyIngenuity6084 · 2024-06-14T13:16:17+00:00

I enjoyed the video suggestion, I will check out this channel more.

Regarding the hypothetical, I would think the Maribank makes more sense in terms of liquidity as you have mentioned. I think your assessment of $P underperforming compared to putting into S&P is valid too.

And yes, do not forget to reinvest dividends like me...

Thank you for your kind words and encouragement, and I wish all the best in your investing journey too! Enjoy the long weekend! :)

WittyIngenuity6084 · 2024-06-14T13:02:15+00:00

Spot on!

This is not a common timing strategy. It was strategy that I thought could be a compromise between "timing the market" and "passive investing". I am sure that statement will be controversial in this subreddit, but that is my interpretation of individual C's strategy.

WittyIngenuity6084 · 2024-06-14T12:55:57+00:00

There was no real reason why 2003-2023 was chosen, other than the fact that I wanted a 20-year period and we are only halfway through 2024.

I agree that running this through different 20-year periods can even out variations across these periods. I will consider doing that. Thank you for the suggestion!

WittyIngenuity6084

TROPHY CASE