Dollar cost averaging

Discussion in 'Silver' started by pug, Apr 13, 2013.

  1. pug

    pug Member

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    I was considering yesterday that volatile changes in price (like yesterday) are reduced through averaging. Short term price changes are just 'noise' and nothing to freak out about when you dollar cost average your investement purchases (and manage your finances well in general. )


    Take a look at how smooth the green line in this chart is.
    [​IMG]


    So here's my question for the veterans. What's the best way people have managed to do dollar cost averaging when stacking silver? Buying weekly, monthly, quarterly, yearly? What's worked the best for you?

    When you buy more frequently, obviously you need to spend less for each weekly purchase... but then that increases your costs for shipping and premium over spot. So what's the 'sweet spot' or best balance between making a large enough order to reduce the impact of shipping, and between making frequent purchases?

    Any thoughts?
     
  2. Chillidog

    Chillidog New Member Silver Stacker

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    Mini allocated. That way you can buy the dips and save on postage. Most of the dealers have some kind of allocated scheme.
    I use gold stackers.
     
  3. bloomst

    bloomst Well-Known Member Silver Stacker

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    +1 on Gold Stacker allocated. You can even buy it by the ounce, and once it is worth the postage, you can post it together.

    Great way to increase your ounces. Instead of buying KFC for dinner...i just quickly put something in the oven...and go click 1oz unallocated!
     
  4. bloomst

    bloomst Well-Known Member Silver Stacker

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    Better still, get to know stacker who live/work in the same city...combine postage work like magic.
     
  5. pug

    pug Member

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    Anyone else got some interesting strategies for regular buying? Do typically buy in regular intervals and amounts? Do you only do once or twice a year? What works for you and why?
     
  6. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    My thoughts (since you are asking)... :)
    Be careful of the DCA myth. It is a load of bunk.
    It is merely a fancy marketing pitch for a savings plan, and is inefficient as an investment strategy.... the mathematics doesn't lie.
    While it may seem to work for those whose investable funds become periodically available (say in line with salary payments), these savers have no real choice.
    However, if you have a lump sum to invest, the returns will statistically be better if you commit it all earlier.

    If you are in the savers category, and looking to balance purchases with postage costs, use a dealer that has the mini-allocated facility, and have the metal sent out when it has built up sufficiently in your account.
     
  7. pug

    pug Member

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    I appreciate what you're saying. Could you clarify a bit further on this. Where I find DCA has helped me as an investor in the past is because when I invest I never fully know 100% where the market is going to be going forward. Sometimes I invest and it goes down and it's a good thing I didn't put 100% in at that time. From what you're saying, you'd do better assuming the market only goes up from where you went all in. Or is there more to this?


     
  8. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    @pug:
    Psychologically DCA has huge appeal, no matter what happens tomorrow, you can convince yourself that what you did today was the right move. If silver declines between now and tomorrow, or between now and next month, you can consider yourself lucky you didn't put all your money in because now you can buy it at an even cheaper price. On the flip side, if the market goes up, and you have to buy tomorrow at a more expensive price, you can turn this around and think you are lucky because at least you bought some yesterday. You will be happy regardless.

    As far as risk is concerned, DCA has no advantage it merely defers risk to a later time. It does, however, lower expected volatility - another phsycological benefit. Even if you use DCA to buy silver over a year or two, at some point you are going to have half of your money in silver, which would make you vulnerable to losing a chunk of it. If you are willing to take that risk in a couple of years, you should be willing to do so today. If not, do you really consider silver a good investment at all? Should you risk any money? Maybe you should lower your allocation to an amount more comfortable or affordable?
    Conversely, if you consider silver a good investment, then what is the risk that price takes off while a chunk of your cash is on the sideline? Given you are bullish on silver, taking this risk of opportunity-loss does not make sense? And can actually cost you more.

    Now, a simple example of the mathematics:

    Let's say that you get a $10,000 windfall. Based on silver's average gains in the past, you figure it's reasonable to expect a one-year return of about 12.5% (about average for silver over the past few decades), which would leave you with $11,250. But you also know that silver is volatile. In fact, it has an annual standard deviation of about 30 percentage points, which means that roughly two-thirds of the time silver will return somewhere between 30 percentage points above (42.5%) or below (negative 17.5%) it's average yearly return. So while you hope to have $11,250 after year 1, there's a good chance you'll end up with as little $8,250 or as much as $14,250, a difference of $3,000 in both directions.

    To avoid that worst-case scenario, you decide to dollar-cost average. Let's assume you put your ten large into a bank account that has zero volatility and pays 5% annually and you then gradually move the money into silver over the course of a year. Based on the historical returns, you can expect to have $10,871 at the end of one year. And based on the lower standard deviation (because of the cash), you expect only a $1,681 swing in either direction. So you've given up $379 in expected return ($11,250 minus $10,871), but you've lowered volatility by a lot more, $1319 ($3,000 minus 1,681).

    This doesn't mean that there's no situation in which you couldn't come out ahead by dollar-cost averaging. Each strategy wins at least some of the time, but DCA is the statistical "dog", losing about two times out of three. Of course, dollar cost averaging will win if your start date falls right before a dramatic crash or at the start of an overall 12 month slump. But unless you can predict these downturns ahead of time, you have no scientific reason to believe that dollar cost averaging will give you an advantage. So we've got to make the best decisions we can based on probabilities. And those probabilities say that dollar-cost averaging isn't a good way to balance risk and reward.
     
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  9. upandaway

    upandaway Member

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    I'd argue the best way to balance risk and reward as much as possible would be to pay slightly more and stay clear of bars and spot sensitive coins altogether. OP, I would look into this as a far more protective way of buying silver and as WRCMAD has shown not put too much in the $ cost averaging unless it aides you keep to the straight and narrow of buying which you would otherwise waiver from through one of the schemes:)

    A comparison from my own collection. I have a number of 10 oz NTR bullion bars bought in 2010 for around $20 an ounce. It is now worth $23 and change an oz relating to today's spot. In contrast I also have 10 PM lunar 1 oz tigers bought around the same time. They are worth double or triple my initial investment of around $3 more per oz than I paid for the bar- I haven't checked of late. There is simply no comparison protection wise or as a shrewd way of buying. Very few investments out there come anywhere near that return.

    If you are buying for 20 years from now I get the point of the bars but still feel it's a poor way to allocate your money into silver. Far better to use the great resource of minds here and pick out some bullion coins with potential. The more you research it and share views on it the better you get at seeing a diamond in the rough.

    It also helps with the sleep too, there are a fair few at the moment that are not getting 8 hours that I have no doubt, unless you had great insight and bought huge back in 2004 or so and there aren't that many of those :)
     
  10. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    Absolutely agree. 5oz lunars are my fav. :)
     
  11. victoryocum

    victoryocum New Member

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    I go with the belief of buying silver only when the price hits real low. Maybe once in a year kind of situation. I buy silver as a long time investment and not for a short-term trading.
     
  12. danman49

    danman49 Well-Known Member Silver Stacker

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    The problem is you only know the price has hit "real low" after it starts rising again.
     
  13. rap53

    rap53 New Member

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    wrcmad said: "Based on silver's average gains in the past, you figure it's reasonable to expect a one-year return of about 12.5% (about average for silver over the past few decades),"

    Price of silver in USD in Nov, 2001: $6 USD. Current Silver price: $18 USD per ounce. This equates to a compound annual growth rate of 6% pa. Nowhere near 12.5% pa.

    The price of silver is incredibly volatile as said here. In fact, if you had brought silver between 2011 and 2016, you are still well and truly in the red (not to mention the huge opportunity cost of missing out on a terrific bull market). To buy your metal holdings all in one hit, in my opinion, is gambling on the price. Dollar cost averaging is the most sensible way to go IMHO. What I suggest is you buy a fixed value of metal, not a fixed weight. If the price of silver is high, you end up buying a smaller weight. If the price of silver falls, you end up buying a higher weight.
     
  14. Slimey

    Slimey Well-Known Member

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    Wrcmad is correct. It is a psychological strategy. No different than diversification. It is all about dealing with your concept of risk and safety. There is always two sides to a coin. Like the old saying about never putting all your eggs in the one basket. The response of course is it is fine to put them all in one basket just keep a closer eye on the basket.
    Everything is a calculated risk. Opening your own shop, buying shares, investing in housing. You assess the potential that is all. No-one has a crystal ball.
    Time will decide in the end. If you had dollar cost average silver since 1979, you would have wasted a lifetime of investment. If you had started in 2001, you aren't doing too badly. Polar opposites using the same method.
     
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  15. Pirocco

    Pirocco Well-Known Member

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    Dollar cost averaging is simple.
    What is simple can do everybody.
    Doing what everybody can do delivers a ticket to Lost City.
    Going against the herd delivers a ticket to Paradise City.
    You know, where the grass is green and the girls are pretty.
     
  16. Pirocco

    Pirocco Well-Known Member

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    There is a sure thing in life: profit gets grabbed.
    Profit happens when the purchasing power of what you bought to store value is lower than what it is when you sell.
    So look at historical data. If for ex house prices doubled over 10 years (don't just look 1 decade back), and the price of the product you consider to store value stayed, then the outlook of the latter, in terms of house purchasing power, is better than vice versa.
    The smaller part / remainder of the story is determined by how greedy you are. Which comes with a bigger risk.
    There are ofcourse other elements to consider too. But usually these are minor and / or very temporary, relative to above.
    Stocks give a good direct indication of outlook. If stocks are big then supply/demand is big and price is low. If stocks are small then supply/demand is low and price is high.
    Yet another way is looking at forums. If it's all flowers bees and sunshine.... it's an old story you know the rest.
    A typical cause of misjudgements is looking at wrong (usually too short) time frames. Often is claimed look 10 years profit chose that. It's the opposite, the longer the profit lasted before you, the bleaker the futures outlook.
    By chosing a specific period, or specific year to date, one can predraw any conclusion. Also, don't measure against peak prices (ex 2011 $50 silver), measure against average prices (2011 $35 silver). Those DO reflect an amount tonnes (stock) that year.
     
    Last edited: May 22, 2020
  17. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    Wow! This is an old thread! :)

    You can cherry-pick any window of time to satisfy any outcome.
    If you had bought between 2011 and 2016, and are still in the red (as you stated) - then that just indicates silver was a crappy investment, and no matter what your method of allocating capital to it, you were wrong in your assessment of it in regards to potential performance. No strategy will save you from a crappy investment decision.
    However, you have also indicated that had you invested your whole allocation in 2001 (without DCA), you'd be reasonably happy with the outcome right now, and that DCA would not have been the most sensible strategy.
    In a nutshell - if you are not confident of committing your full allocation to an investment in one go, then you are not confident it is even a good investment, and maybe should be looking elsewhere.
    The numbers are there to back this up.
     
  18. rap53

    rap53 New Member

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    Hi Slimey, Both Wrcmad and I are actually incorrect. That is because everybody's financial situation is different, and because of this, each individual requires a different approach. Pug may be investing in gold for capital preservation, like myself. If this is the case, then avoiding tail risks is paramount, and going all in is the last thing you would wish to do. Your situation may be different. You may be an experienced gold investor, and have a strategy you apply. But to go all in, you need to know the investment very well indeed.
     
  19. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    I actually addressed this in my original post - 7 years ago.
    So it is only you who is incorrect. :p
     
    Last edited: May 22, 2020
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  20. rap53

    rap53 New Member

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    it wouldn't be the first time, probably not the last time either :)
     

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