Trend Tracking And Dollar Cost Averaging (DCA)

One reader had these thoughts to see if he could combine DCA with trend tracking:

What are your thoughts on dollar cost averaging (DCA)? The traditional concept, such as contributing to an IRA monthly or quarterly, or regularly to a 401K at work, is a good way to save/invest. To get the most benefit of DCA, the most volatile fund should be used, to buy more shares on the downswings. (A fund with no volatility, such as a money market, looses this advantage.)

However, how should this be managed with sell stops and TTI trend exits? The DCA concept is to keep investing through market downturns.

How should DCA be incorporated into your plan?

I’ve never been a friend of dollar cost averaging since the issues I have with it are not much different than those with buy-and-hold.

To be clear, I use a form of dollar cost averaging after the markets have generated a buy signal to move into equities via my incremental buying process. So I try to average in on the way up (not on the way down), when momentum supports my decision.

Take a look back at 2008. Using DCA, you would have purchased incrementally more shares as asset prices declined. These purchases at lower prices will show some gains during this recent rally. However, the bulk of your assets, which you had accumulated prior to the crash, took a big hit.

DCA may get you in the market at lower prices from time to time, but it will not prevent your portfolio from getting slaughtered during a major market decline. If you have incremental money to invest, do so during bullish periods only and track your sell stops as recommended.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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