On.. Not all DCA are Created Equal

-

What do we do if we have a stack of cash to deploy? I believe that for an asset that is predicted to go up in the long term, Lump Sum is the way. 


Having said that, and I do have a stack of cash sitting on the sidelines at the moment, I chose to DCA (Dollar Costs Average) instead.  Mathematically speaking, I think Lump Sum gives a better financial return. But it is not all about the total returns. DCA means that I will a stack of cash available in case of an emergency. It is also more fun to deploy cash over time. 


So DCA is better, that is settled then? It is in general but there are still some variations in how you can deploy your DCA. Although I prefer, DCA for the reasons stated above, I also like financial returns. Therein, I explore the different DCA scenarios. 1. DCA at the same rate over the investment term. 2. Front load your DCA. 3. Back load your DCA.


Figure 1 shows the DCA Scenarios. The assumption is that I have 12,000 AUD to deploy over a 20 year period with a return of 4% per annum. The first scenario (Green Bar) is an equal weighted DCA, which is the most commonly used. The second scenario (Peach Bar) is to front load the DCA, that is to start with a lump sum of 6,000 AUD and deploy the remaining over the next 10 years. The third scenario (Blue Bar) is to back load the DCA, that is to start with just 600 AUD and wait until year 11 before starting to deploy your stack.


As you can see, the front load scenario yields the best return. But to be honest, over a 20 year period, the difference is not great. Which means, it doesn't really matter how you DCA. Now, what if I increase the return to 10% per annum instead. As shown in Figure 2, the front load scenario starts to stand out!


Therefore, instead of an equal weighted DCA, I actually do a front load DCA to get a better return.






Comments

Post a Comment

Popular posts from this blog

On... Delaying Retirement

-
Image
Before you reach your first million, you should not take your foot off the gas pedal. If you really want to retire or retire early, consider reducing your expenditure. Not talking about small items like having a coffee but big ticket items, say values of more than 10k AUD. Because the wonders of compounding works in reverse when you spend big, it can significantly delay your retirement. I ran a few scenarios to compare what our spending do to our retirement planning. These are very simple scenarios with very rough numbers. You can do this for yourself and see how your spending delays your retirement. That should help you think twice before you go on your next big purchase! The chart below shows 3 scenarios. For all scenarios, it assumes the starting investment capital of 130k AUD with a portfolio return of 10 percent per annum. I assume you can retire when you have grown your account to 1 million AUD. Scenario 1 ( Blue ) is the Base Case. Scenario 2 ( Grey ) is a scenario of the impact...
Read more

On... 2024

-
Image
2025 marks the starting of the eight year of my investing. 2024 is a bumper year for me ( see below Figure ). My Net Worth broke All Time High in 2024 with a growth of 45% ( Largest growth so far ). The earlier part was pretty good and trending upwards until circa April 2024. It then started to dump and luckily reversed in December. ROI for my Portfolio is 7.9% ( ROI since Inception ). For the latest Portfolio Updates, see  Portfolio Updates .  In 2024, I started to include shorter term trades after listening to the 'Top Traders Unplugged' podcasts. They recommended diversifying across time frames to capture all possible upsides. The short term trades have a holding period of days to roughly a month. This year ( and consistent with the past few years ), Buy and Hold largely outperforms short term and mid term trades. Does it mean that I should revert to Buy and Hold? I think probably not. It just means that the market structure favors Buy and Hold but we do not know how the st...
Read more