DCA in bear market

[Deleted]

My wife asked me why dca into a falling market when you know you are going to lose money.

I know R48 and fd1000 are both against it.

I could not think of a good reason.

Anyone knows why?

DCA = dollor cost averaging.

[roi2020]

Here's a good Fidelity article laying out the pros/cons of dollar-cost averaging.

[steelpony10]

@waffle ,

        A long term cash holding is the only sure threat to your personal inflation rate. This is the reason why one invests. The longer one holds cash earmarked for investing the more purchasing power one loses. Cash held for a reason besides protecting your personal inflation rate seems fine to me. We’ve basically stopped investing at this point and can now spend more.

         I suppose you could explain the math. Investing in 100 shares this month for $100 then 100 shares next months for $50 equals 200 shares for $75. No one can predict long term market movements because one does not know the future. No one can consistently invest at the lows in this case by waiting a week and investing at $50 per share.

         We’ve used DCA and reinvestment for 44 years now. Those initial share purchased at DOW 750 are worth a fortune today. Adding to holdings automatically on a set schedule and waiting is the easiest way to have a secure future. It’s a proven investing technigue.

[Deleted]

I agree with steelpony depending on your goals and investing strategy/beliefs. Steelpony and I don't believe you can time the market and that time in the market is more important. That would be the basic message to convey - if you believe that. If you have a real low period - sure - take advantage of it. There are many instances you can point your wife to - investing after the GFC. Investing after the March 2020 crash. Discuss the Mr. Market analogy with her or have her read that chapter of The Intelligent Investor. Of course try not to buy overvalued equities and accept sometimes you just won't get it right. Keep time horizon in mind for allocation decisions. DCA is where I am heading now that I am fully invested. I will add a certain amount each month while still working and have my dividends/distributions on automatic reinvestment.

It took me several years to get a third of my portfolio invested. I have bought at all different levels - hence a type of DCA.  

Like steelpony, my time in the market with reinvesting has achieved my goals.

[archer]

Not DCAing in a down market could be argued as market timing, and some are of the philosophy that timing the market is unwise. From the don't time the market perspective, you don't know if the market will continue downward or if it will turn around.

Market timing aside, the market is going down faster than cash is losing value to inflation. If you look at cash as one of your assets like equities and bonds, cash is doing well this year.

[Deleted]

Archer is making your wife's argument. I would say that cash has no realistic potential for capital recovery - hence a permanent negative return - and you are losing purchasing power. Plenty see if different and that its losses are comparable to that of real assets such as stocks and houses. Again - depends on your beliefs. I think using cash to purchase good value, particularly when the price falls makes sense so long as the overall allocation is consistent with goals and ability to fund those goals.

[steelpony10]

@waffle ,

         One other aspect of investing from a personal observation only. It is a fact that in most years September and October are the worst market months. My opinion is adding to that years bad news (and there is always something to fear) is the selling of holdings by institutions and professional investors in mass creating a herd exit to cash after which a brochure states “in this trying year” we’re only down 10% while markets as a whole are helped down with this move to lower values. 

          Since holding cash long term is a loser by November the new investing year is started again by the same group while everyone else slowly follows back in waiting for Santa Claus. I find this entertaining to watch and in the past looked at this period as a dependable opportunity to invest for income.

           The last 15-20 years of your life takes different managing skills then the last 40. Our plan had a certain quit point which I think we’ve reached. I really have nothing against spending down the present portfolio values from 85 on understanding they may be higher or lower year by year. Based on the past only I know 7/10 markets do better then a bank account. 

[steadyeddy]

Sept 24, 2022 23:28:43 GMT @waffle said:

My wife asked me why dca into a falling market when you know you are going to lose money.

I know R48 and fd1000 are both against it.

I could not think of a good reason.

Anyone knows why?

DCA = dollor cost averaging.

@waffle, do you really know you are going to lose money? If you say "Yes," I agree with your wife. If you say "May Be," or "No," then I would invest.

So the decision is in your hands. 

[Chahta]

Most of us in retirement should have a fully invested portfolio. As steelpony10 says we need to manage differently the last 15-20 years. DCA is about building positions over a long time frame. If you are rebalancing then DCA should not be done. I would not DCA back if you went to cash in the down market.

If you aspire to be a trader it’s different.

[mozart522]

I don't really like the term DCA for what Sara and perhaps waffle are doing. If you are investing out of your paycheck into a 401K, IRA or other types of organized investing, then you really don't have much choice. You aren't really choosing to DCA but you are getting the result. In most cases, that DCA period is set at every two weeks. You either invest, and sometimes may even get a match, or you quit investing and build cash. I think most would agree that investing on a regular basis while you are earning money is the right path. I'm sure R48 and FD would agree.

OTOH, someone like Mustang who sold his house and has a large amount of cash which he is deploying in increments over some time period is deciding to DCA rather than putting it all in. He could choose to put it in monthly or even quarterly. I have read many times that it is better to put it all in at once, but I'm sure that wouldn't be true in every time period.

I don't believe R48 or FD are really talking about either type of DCA, which is mechanical and not based on timing. I believe they are suggesting not to invest when the market is trending down, moving averages and candlesticks and such, by purposely investing when the market is falling, a non-mechanical action.

Someone who DCAd from May to now, for example, bought at low prices in June, higher prices for the next couple of months, and then lower prices this month. That is not the same as "dca into a falling market when you know you are going to lose money." If you plan on holding for years to come, you will not likely lose money, and in fact, will make money and likely have more shares than if you hold cash. Mutual funds that distribute dividends, if reinvested, produce more shares no matter what the price is. When the market turns around it will increase your rate of return.

[chang]

Sept 24, 2022 23:28:43 GMT @waffle said:

My wife asked me why dca into a falling market when you know you are going to lose money.

I know R48 and fd1000 are both against it.

I could not think of a good reason.

Anyone knows why?

DCA = dollor cost averaging.

Turn the question around. Suppose I asked:

- Why not DCA into a rising market when you know you are going to make money?

Why own stocks at all in a falling market? Why not short SPY?

Why not own a 3X SPY fund in a rising market?

The answer to all of these questions is the same. You don’t know. If there’s one thing I know, it’s that nobody knows.

Time IN the market.

[Norbert]

There are reasonable approaches to investing; and not so reasonable approaches.

@slooow insists that we can't time the market, but then again she's not buying the "market". She has a sharp eye for value in individual names and looks for a sustainable dividend. She believes she can differentiate between attractive stocks and unattractive stocks using various criteria. She has stated that using index funds to get exposure to the entire market is a dangerous game.

It seems to me that investors with Sara's skills will do fine. To diminish the risk of buyer's remorse, such an investor could DCA into targeted individual stocks. However, I think not everyone has her skill to analyze individual names and commit to them longer term. (Personally, I do not.)

If the question is whether to DCA into the broader market, I'd say that's very tricky. Just as Sara looks for value in individual stocks, we'd have to first find value in the broader market. Was there value there in 1999? At the start of this year? Absolutely not. What's the point if DCAing into an overpriced market? It seems a rather careless thing to do.

On the other hand, there was a sudden, sharp market-wide collapse thanks to Covid in early 2020. Prices were suddenly cheap, plus the Fed and the government intervened. That was a beautiful moment for investors to dive in (or to DCA in, if feeling hesitant).

We can't FORECAST the market, but there are moments when it's very attractive and moments when it's clearly not. So, we can very definitely TIME the market. Rarely maybe, but sometimes.

My point is that DCA is not a fix for ignorance. It's critical to understand the value of what we're buying, whether in individual stocks or with the broader market.

-----

At present stocks are far more attractive than in January, but not cheap like they were in early 2020. Tricky! What to do? We certainly don't know what Mr. Market will do.

And it's true that market momentum is downwards, with the Fed withdrawing its easy money strategy. Momentum isn't easy to trade, but I think it's a powerful market force. I'd hesitate to buy into downwards momentum, except to pick off underpriced gems here and there.

Personally, I wouldn't act unless the odds are strongly in my favor. Right now it feels like flipping a coin (unless you have a long time horizon and wouldn't mind more volatility).

Sara's "time in the market" mantra only makes sense if you clearly understand the value of what you're buying.

N.

EDIT: sorry Chang. We posted simultaneously, didn't see yours.

[johntaylor]

One reason to keep DCAing is to retain motivation by steadily increasing share balances (something is going up this year).

In a down market, shares are cheaper if you are planting long-term seeds.

[Deleted]

A nice/understandable enough synopsis of the ideas. Note that the use of average and most to describe investors should avoid anyone feeling their method is at issue. They are not.

financebuzz.com/time-in-market-matters

I don't buy the US market although I do have a small amount in VTI and the S&P index. The problem with the S&P is the concentration in my opinion. However those are some mighty fine companies being concentrated so I have a piece.

I also have a small piece of SCHD. The idea is for me to have somewhere to move some of my individual stocks, because I have too many. Point is, if I were starting today (beginning of bear market) and had all cash, I would probably start DCA'ing in on at least a quarterly basis, or if my time horizon was more than 10 years, I might just put it in much quicker depending on my evaluation of value. And I would probably pick VTI and SCHD as my cores.

I have some stocks I am worried about - mostly MMM - and I went against my better sense when there was a paltry dividend increase. So my "skills" have some flaws. Frankly my "skill" is diversifying. So now I get to figure out how to manage the risk for MMM - still deciding. I don't recommend this to anyone. I have done it several times and never enjoy it. However, at the end of the day, I pretty much mirror market returns with better income. The point of this though is DCAing or plunking in all at once, I would only count on average market returns. Which are pretty nice in the long run. Buying market indexes at p/es far above average never makes sense and I would pick other options at that point. I would put my money to work (again depending on time horizon) and not stress about the moment to do so.

[mozart522]

Sept 25, 2022 5:41:42 GMT Norbert said:

There are reasonable approaches to investing; and not so reasonable approaches.

@slooow insists that we can't time the market, but then again she's not buying the "market". She has a sharp eye for value in individual names and looks for a sustainable dividend. She believes she can differentiate between attractive stocks and unattractive stocks using various criteria. She has stated that using index funds to get exposure to the entire market is a dangerous game.

It seems to me that investors with Sara's skills will do fine. To diminish the risk of buyer's remorse, such an investor could DCA into targeted individual stocks. However, I think not everyone has her skill to analyze individual names and commit to them longer term. (Personally, I do not.)

If the question is whether to DCA into the broader market, I'd say that's very tricky. Just as Sara looks for value in individual stocks, we'd have to first find value in the broader market. Was there value there in 1999? At the start of this year? Absolutely not. What's the point if DCAing into an overpriced market? It seems a rather careless thing to do.

On the other hand, there was a sudden, sharp market-wide collapse thanks to Covid in early 2020. Prices were suddenly cheap, plus the Fed and the government intervened. That was a beautiful moment for investors to dive in (or to DCA in, if feeling hesitant).

We can't FORECAST the market, but there are moments when it's very attractive and moments when it's clearly not. So, we can very definitely TIME the market. Rarely maybe, but sometimes.

My point is that DCA is not a fix for ignorance. It's critical to understand the value of what we're buying, whether in individual stocks or with the broader market.

-----

At present stocks are far more attractive than in January, but not cheap like they were in early 2020. Tricky! What to do? We certainly don't know what Mr. Market will do.

And it's true that market momentum is downwards, with the Fed withdrawing its easy money strategy. Momentum isn't easy to trade, but I think it's a powerful market force. I'd hesitate to buy into downwards momentum, except to pick off underpriced gems here and there.

Personally, I wouldn't act unless the odds are strongly in my favor. Right now it feels like flipping a coin (unless you have a long time horizon and wouldn't mind more volatility).

Sara's "time in the market" mantra only makes sense if you clearly understand the value of what you're buying.

N.

EDIT: sorry Chang. We posted simultaneously, didn't see yours.

So in 1999, someone having money directly taken from paycheck into a 401K or the like should continue to DCA, but into bonds or even cash, or at least not large cap growth.

[archer]

One definitely runs the risk of losing money short term by investing in a downturn. Even investing in the rallys this year has netted a loss currently. For a long term investor I think the pros outweigh the cons for those who are not skilled traders, and remember a skilled trader on average is not batting 1000. The reason I advocate for DCA is that the danger of investing in a downturn is lessened by catching the early days of a rebound, which, often are some of the strongest days. Further looking at this year, was it better to buy the dip or buy the rallies? Rallies, even bought on the early side meant buying at a higher price. Another point is that if the market were going up only 50% of the time and down 50% of the time, buying in a downturn would mean more and longer losses compared to our long history of downturns making a small proportion of long term market activity.

There is always a possible compromise. Looking at past downturns the advantage of waiting to invest well into them (like now) rather than early on has proven advantageous, the closer to the bottom the better. We are closer now than we were earlier this year.

Another compromise, is to use DCA with the caveat of holding off when all the obvious causes of the downturn are intensifying. Investors don't need to take the attitude that the market is 100% an unknown, or that their ability to predict market activity is completely impossible. Also, similar to investing in a down market, often retirees will cut back spending in a down market if they can afford to. I think DCA is more just a choice of how hands on one wants to be.

[FD1000]

OP: I know R48 and fd1000 are both against it.

Disclaimer: Never in my life, I used a typical DCA, which is deploying cash over months.

My DCA idea is different from most. In "normal" market, I would invest it all at once.

Suppose you think markets are "risky", do the following:
1) What is your final goal? Suppose it's 2/3 stocks + 1/3 bonds and you are looking at 10 months of DCA. Let's use only 2 funds: VWENX(Wellington) + VWIAX (Wellesley)
2) On day one, you invest all the money in VWIAX(about 40/60 stocks/bonds).  
3) Every month, you sell 10% of VWIAX and buy VWENX(about 65/35 stocks/bonds).
4) The above is just an example, you can select different funds, final target and DCA periods

Why the above:
1) You invest on day one, you invest everything which research show it's usually the best. The idea is no cash.
2) You are in the market all the time.
3) You will change the risk gradually.

I love thinking outside the box.  It worked extremely well for me. 

As usual, forget income, single stocks, and trading. Most will do better using KISS and limited number of funds

[Mustang]

An investor does not lose money unless they sell. I lost nothing in '08. And I have lost nothing this year. I've actually gained.  Once purchased the investor no longer owns dollars.  He owns shares.  Reinvested dividends and capital gains have increased my number of shares as have the dollar cost averaging shares I have purchased.

I posted something like this before. People say we should buy only when there is a sign of recovery. Wellington is currently around $39 per share. In 2008 when prices were falling and there was no sign of recovery I bought Wellington on the way down at $17 and $12. I still hold those shares. Should I not have bought them?

I cannot see the future and the so called experts are all over the place. I recently heard a news report that said the odds of a soft landing is diminishing. I would think so. Inflation is high and government spending is still stimulating the demand side. Listening to the news, productivity is down. Companies have stopped trying to fill vacancies and started laying off workers. Future unemployment is expected to go from 3.8% to 4.4% next year. Inflation is expected to continue to be high until 2024. (I think that might be optimistic.) Winter is coming and demand for fuel is going to increase. Even now gas prices are starting to go back up. They have been low because oil is being pumped from the strategic reserve. I heard one report that said the government is going to stop after the election.

This reminds me of the 70s. Bengen said the worst time to retire was 1968. In November 1968 the SP500 hit 907. Some say not to buy anything on the way down but to wait for positive signs that we are past the bottom. Would that have been in July 1970 when the SP500 hit 503. It then rallied to 713 in 1971? Or maybe the investor should have waited until October 1974 when the SP500 hit 428. Again there was a small rally. But the SP500 dropped to 335 in June 1982. If an investor waited until it hit bottom he would have been out of the market 14 years.

From 1968 to 1982 (The same 14 year period.) a $1,000 investment in Wellington grew to $2,135.

Wellesley didn't exist in 1968. It was created in 1971. Looking at the 10 year period from 1971-1980 a $1,000 investment grew to $2,119. Wellington for that same period went from $1,000 to $1,898. As I have posted before Wellesley outperformed Wellington during the stagflation years but Wellington outperforms Wellesley during bull markets.

I can't see the future. I have no idea if this is going to be a short term problem or a long term one. On one hand our government is stimulating demand and on the other it is punishing it. But I do know that for buy and hold investors the market will eventually recover and it really doesn't matter if $17 and $12 shares were bought on the way down or the way up. A $2,000 buy gets the investor the exact same number of shares.

I have excess cash so I'm using DCA to invest it just as I have always done.  Unless you plan of selling in the short term it doesn't matter if the shares are bought on the down side or the up side.

[win1177]

I’ve done a “mix” of DCA investing in our retirement accounts (both Roth IRA, Roth 401K, and regular IRA, 401K) over the years, as well as buying individual dividend growth stocks in our taxable accounts. Our taxable accounts have done VERY well over the long run, mainly because we buy and hold high quality wide moat dividend growers. Many of them have turned into “10 baggers” or more, ie appreciating 10 times (or more) their original cost. Much of this is due to “time in the market”, and less “timing the market”.

In a situation like now, with a clear “negative bias” due to elevated inflation and a Fed Reserve bent on “stomping the hell” out of inflation, there are elevated risks to putting money in equities. However, if one has “long term money” (meant to be invested 5+ years or more), the “best” way to move that money into the market (IMHO) is by gradually adding it to one’s equity positions, such as DCA. Unfortunately, I “jumped the gun” earlier this this spring, and bought too many positions in individual stocks (MMM, NEM, VZ, INTC, etc.) that have since declined further. But I think in general using DCA is a smart way to gradually “steer” money into the market, although traditional studies have shown the “best” way (long term) is to just go ahead and put a lump sum in right away. This is due to the fact that the long term trend has been generally UP, although as many have pointed out you may suffer through years of disappointing returns before the upward trend returns.

Win

[Deleted]

Great post Mustang. This is why holding stocks for the long run is a great investing strategy. I am sure there are others. Would be interested in hearing your thoughts if someone wanted to follow your strategy with Wellesley and Wellington. You have probably posted it before and if you have the link. I would not mind thinking of simplifying and your strategy is one I have always been interested in. It will take me years to do any transition.

Win - As I recall you bought all of those at decent prices. I really think in 5 years (if not sooner) you will have forgotten your post. They are all solid. 3M is the only one on your list that worries me a bit as I have seen the slow grind down before and they aren't doing well on the litigation front. I may"flip" some to UPS, PFE and CVX. Not sure. A key thing to listen to was the meager dividend raise. I'm watching it.

[win1177]

Sept 26, 2022 1:02:53 GMT @slooow said:

Great post Mustang. This is why holding stocks for the long run is a great investing strategy. I am sure there are others. Would be interested in hearing your thoughts if someone wanted to follow your strategy with Wellesley and Wellington. You have probably posted it before and if you have the link. I would not mind thinking of simplifying and your strategy is one I have always been interested in. It will take me years to do any transition.

Win - As I recall you bought all of those at decent prices. I really think in 5 years (if not sooner) you will have forgotten your post. They are all solid. 3M is the only one on your list that worries me a bit as I have seen the slow grind down before and they aren't doing well on the litigation front. I may"flip" some to UPS, PFE and CVX. Not sure. A key thing to listen to was the meager dividend raise. I'm watching it.

Thanks Sara! I may sell some of my higher cost basis MMM, just to get some tax losses this year. Overall, I’m planning on holding my positions, with the exception of maybe some tax loss selling. Just hoping to add as new money comes in, one great thing is we still have more income than outflow, even though I retired. Great place to be!

Win

[retiredat48]

Sept 24, 2022 23:28:43 GMT @waffle said:

My wife asked me why dca into a falling market when you know you are going to lose money.

I know R48 and fd1000 are both against it.

I could not think of a good reason.

Anyone knows why?

DCA = dollor cost averaging.

Well, I see my name highlighted here...

No, the premise is wrong re me.  I strongly support DCA in certain cases.

For starters, the primary investing vehicle for accumulators is a 401.K.  This investing is a typical bi-weekly take out of ones paycheck.  This buys investments bi-weekly, a form of DCA.  Great.  You catch the low points in the market.  Such DCA partly enabled me to retire early.

BTW academic studies show if one has a lump sum to invest, investing it immediately, versus starting DCA, is the best outcome, overall.  This is partly because markets have continually gone up in the long run.  Time in the market is increased.  Like if you invest in an IRA yearly, best is immediate money input.  However, many cannot do this-behavioral and fear.  Like what ot do with an inheritance.  The goal is to not lose any.

However...always some howevers.

I do not use or promote DCA in my investing.  Two things predominate:  In bear markets, my investing mantra, after down 20% or more, is:

--Do not sell

--DO NOT SELL

--DO NOT SELL!

Simple...and no buying...no DCA.

I use a technique I call Pyramid Up, developed from a 1950's top stock investor's personal strategy (no funds existed then).  Briefly, I buy in buckets, and only if the market is HIGHER on buying the next and follow buckets.

  So, if a "compelling value" exists to start buying, I may buy one bucket...but all remaining buys must be higher. A compelling value might be an SCHD with a very high yield. 

Otherwise (normally) I wait until the market has apparently bottomed and turned into an uptrend.  Mostly determined by the Moving Averages and slope of the MA...and my experience.  I want to be "late".

By being late, momentum is on my side.  Further I use momentum to my advantage, in selecting WHERE and IN WHAT to invest.  This sorting is invaluable...to be in the right assets classes.  You get a preview.

PyrUp is the insurance policy.  In a bear market it does way better than lump sum investing, and beats DCA (which is in the middle of returns).  You are more protected.  In a completely up market...lump sum is best; DCA and Pyr Up even...second best.  This is your cost of insurance against disaster.

Lastly, the MAIN reason to use PyrUp is behavioral.  It enables one to invest with confidence.  I state: PyrUp allows me to buy anything, at any time, under any market conditions, and be confident.  Like, if I buy a first bucket today, and the fund goes down, I buy no more.  Risk is minimized.  Loss minimized.  It is fear and inaction that keeps people from investing at good times.  They wait for markets to go to new highs, concluding it is now "safe to buy."  You can't backtest this feature.  Did you miss out on the last bull market rise after COVID??

And if you don't like the term PyrUP, think of investing by NOT AVERAGING DOWN.  If you do this, you are buying into downtrends...why do this??  BTW in over 50 years of using PyrUp, I have only had two instances of meaningful capital losses in a purchase (way after PyrUp got me in, in a positive position).  

Bottom line...use DCA in your main accumulation investment...401.Ks.  Suggest 100% stock funds to $150,000.  In your IRAs...suggest PyrUp in five buckets into your desired stock funds, annually...starting whenever you would have chosen for a lump sum or DCA start. (PyrUp is a buy-in strategy).  Retirees switching fund monies, use same day switches or PyrUP the money balances going into stock funds.  You will sleep better!

If we get into a confirmed bull market, use lump sum in lieu of DCA, if you do not use PyrUp.

BTW Anyone using PyrUp buying since last November, is way, way ahead of lump sum or DCA buying, as they have likely only bought one bucket!

Edit to add: your wife is right, waffle...why buy something you think is going down?!?!

Good luck all.

R48


 

[Mustang]

Sept 26, 2022 1:02:53 GMT @slooow said:

Great post Mustang. This is why holding stocks for the long run is a great investing strategy. I am sure there are others. Would be interested in hearing your thoughts if someone wanted to follow your strategy with Wellesley and Wellington. You have probably posted it before and if you have the link. I would not mind thinking of simplifying and your strategy is one I have always been interested in. It will take me years to do any transition.

There are many investment strategies and withdrawal methods.  The ones you use depends upon your individual goals and tolerance for risk.  Longevity risk is of primary concern.  No one wants to run out of money.  Variable or dynamic withdrawal methods protect the portfolio by reducing income during bear markets. Income will be less than planned (sometimes significantly less) approximately half the time. Fixed withdrawal methods protect income but are subject to sequence of returns risk. This is a problem when an individual retires during a market peak and the calculated fixed dollar withdrawal cannot be supported after the market correction. (We are currently past the peak.)

Stable income sources should be used for needs and variable income sources should be used for wants.  Stable sources of income are pensions, social security, and annuities.  Sometimes that is not enough and other sources are needed. 

Wellington and Wellesley (W&W) are only one part of my retirement portfolio and my retirement portfolio is separate from investments for other purposes.  Other funds could be used but these two funds are highly rated by numerous financial publications. Wellesley is a conservative-allocation fund (roughly 40/60 stocks to bonds).  This asset allocation is very close to Modern Portfolio Theory's (Markowitz, 1952) minimum risk portfolio (currently 33/67).  The maximum risk portfolio is 100% stock.  MPT discusses the maximum return curve for a given level of risk.  Increasing bonds reduces total returns while increasing risk.  Increasing stocks increases both risks and returns.  Risks sometimes have to be taken to get adequate returns.  Wellington is a moderate-allocation fund (roughly 60/40).

Minimum required distributions from our traditional IRAs provide variable income.  Our goal for W&W is to provide a stable, inflation adjusted income.  Bengen's 4% Rule does that.  Before Bengen's 1994 study financial advisors were using average returns to calculate withdrawals.  Depending on when retirement started averages could cause the retiree to run out of money.  Since we cannot see the future Bengen's 4% Rule is based on the worst case scenario.  He determined that the best asset allocation was between 50-75% stock.  This has been confirmed by other studies (Trinity,1998 and Wade Pfau 2018). Equal investments in W&W has an asset allocation of approximately 50% stock.

SPENDING AND WITHDRAWALS ARE TWO COMPLETELY DIFFERENT THINGS.  Spending is based on a budget that covers needs and wants.  Withdrawals are based on using a method that has a high probability of success.

When withdrawals start the initial dollar withdrawal will be 4% of the W&W balance.  The annual January withdrawal will be held in cash (a savings account) that will be used to meet monthly needs. Subsequent year withdrawals will be adjusted for inflation using the announced social security increase.  Sometimes spending will be less than the withdrawal.  Sometimes it will be more. Cash is the buffer.

An idea I got from the bucket strategy is to keep an additional cash reserve to prevent withdrawals when a fund is losing money.  Only one time in history did W&W both lose money at the same time two years in a row (1973 and 1974).  I set the cash reserve at two years.  Theoretically, in January cash should be equivalent to three years of withdrawals dropping down to two in December.  If both funds lose money no withdrawal will be taken that year. The cash reserve will be used instead.  Since spending and withdrawals are not the same, if in January cash reserves are already three years no withdrawal will be taken.  If in January cash reserves are less than one year's withdrawal the withdrawal needs to be taken regardless of loses if major spending adjustment cannot be made.

Darrow Kirkpatrick (“These are the Best Withdrawal Strategies”, Money, no date) found that how money is withdrawn is as important as the asset allocation.  His test was on 50/50 stock/bond allocation. The worst way to withdraw money is to rebalance the portfolio every year.  The best was a complicated CAPE median procedure.  In the middle was a simple procedure based on performance.  The annual January withdrawal will be taken from the W&W fund that has the highest end of year balance.  No rebalancing.  My tests have shown that the funds automatically rebalance after two or three years.

Written out this seems more complicated than I wanted so I created a one page checklist for my wife to use.

Edit: A 4% initial withdrawal is for a 30-year payout period.  5% can be used for a 20-year payout.  6% for a 15-year payout.  These are worst case withdrawals.  If that doesn't meet needs than more can be taken.  But it reduces the probability of success.  Based on historic data, 5% lasted 30 years 70% of the time. 6% lasted 20 years 79% if the time.  It lasted 30 years only 46% of the time.

[retiredat48]

Nice post, Mustang ,...but doesn't say anything about the sibject of this thread, namely, DCAing in a bear market.

R48

[Deleted]

Sept 27, 2022 16:37:23 GMT retiredat48 said:

Nice post, Mustang ,...but doesn't say anything about the sibject of this thread, namely, DCAing in a bear market.

R48

Mea culpa - I asked for the post. 

[Deleted]

This was a great thread. Thank you everyone. Learned a lot.

Discussed with my wife. She says she kind of understands all this but when people are confident with high probability that market will fall why add more cash to the market? She has a good point. At some junctures one has to take a position. This year is one of them.

Also Damodaran in his latest blog this Monday wrote this -
"I think that the given market pricing today, and my expectations of expected earnings and cash flows, stocks are very mildly over valued on September 23, 2022. I trust my judgments enough that I will leave my existing equity holdings intact, but I am not quite ready to jump in and make bets on market direction now. "

Damodaran talked about  jumping in and not DCA specifically but why even take a high probability loss on say 5-10% of your cash. I understand it is not a loss till you sell but 20% decline takes 25% climb to get to even.