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IF I simply interpret Dollar Cost Averaging as a method of putting an amount x in my investment every month through thick and thins of the market, then I am contradicting what the article in wikipedia says about DCA here

https://en.wikipedia.org/wiki/Dollar_cost_averaging

  • Here it clearly states that Dollar cost averaging is not the same thing as continuous, automatic investing.
  • It also states that contributions should be adapted to uptrend and and downtrend of the market.
  • Which means that I should be contributing more when market is down and less when it is in a bull rage?
  • Also, does it also mean that what my 401k Contributions are doing are not strictly dollar cost averaging?

If so, what would be the contribution ratio between bear and Bull market. Is there any way to put it in scientific terms (or a formulae)?

any thoughts?

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    DCA is a loosing game, pyramiding is a much better strategy. – user9822 Jan 23 '16 at 23:34
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I believe that the Wikipedia article is attempting to draw a difference between dollar cost averaging as a result of investing when money becomes available (i.e. 401k contributions from your paycheck) and spreading out a lump sum investment. For the former you want to continuously invest as the money becomes available following your predetermined plan for allocation. For the later it may be reasonable to consider the market as you decide how and the timing for investing.

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Dollar cost averaging is an great way to diversify your investment risk.

There's mainly 2 things you want to achieve when you're saving for retirement:

1) Keep your principal investment;

2) Grow it.

The best methods recommended by most financial institutions are as follows:

1) Diversification;

2) Re-balance.

There are a lot of additional recommendations, but these are my main take away. When you dollar cost average, you're essentially diversifying your exchange risk between the value of the funds you're investing.

Including the ups and downs of the value of the underlying asset, may actually be re-balancing.

Picking your asset portfolio:

1) You generally want to include within your 401k or any other invest, classes of investments that do not always move in total correlation as this allows you to diversify risk; 2) I'm making a lot of assumptions here - since you may have already picked your asset classes.

Consider utilizing the following to tell you when to buy or sell your underlying investment:

1) Google re-balance excel sheet to find several examples of re-balance tools to help you always buy low and sell high;

2) Enter your portfolio investment;

3) Utilize the movement to invest in the underlying assets based on market movement; and

4) Execute in an emotionless way and stick to your plan.

Example -

Facts 1) I have 1 CAD and 1 USD in my 401k.

Plan I will invest 1 dollar in the ratio of 50/50 - forever.

Let's start in 2011 since we were closer to par: 2010 - 1 CAD (value 1 USD) and 1 USD (value 1 USD) = 50/50 ratio

2011 start - 1 CAD ( value .8 USD) and 1 USD (value 1 USD) = 40/60 ratio

2011 - rebalance - invest 1 USD as follows purchase .75 CAD (.60 USD) and purchase .40 USD = total of 1 USD reinvested

2011 end - 1.75 CAD (value 1.4USD) and 1.4 USD (value 1.4 USD) - 50/50 ratio

As long as the fundamentals of your underlying assets (i.e. you're not expecting hyperinflation or your asset to approach 0), this approach will always build value over time since you're always buying low and selling high while dollar averaging. Keep in mind it does reduce your potential gains - but if you're looking to max gain, it may mean you're also max potential loss - unless you're able to find A symmetrical investments.

I hope this helps.

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    Rebalancing, yes sell your best performing assets with the best potential to keep gowing further up to buy low performing assets with most potential to keep going further down. This strategy will not help you grow your pot. – user9822 Jan 24 '16 at 1:26

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