[Ensam]

(01-26-2014 05:26 AM)Sugar Wrote:  

So DCA is investing the same amount of money in an investment month over month, over a specific period of time, e.g. $200/month for 20 months?

Strictly speaking, yes. The idea is that if you have 100k to invest today there's a risk that you might put the 100k in and then the market tanks tomorrow and you'd lose 40% overnight. By splitting the investment up and investing it every week/month/quarter you can hedge against that risk. It turns out you actually get a slightly better return on average because by always putting in the same dollar amount you automatically buy more shares when the price is low and less when it's high. Most low cost brokerages and direct stock purchase plans wave transaction fees if you do a regular direct deposit so there's really no downside.

Now unless you just sold an asset or got an inheritance most people don't have a large sum of money to invest at once. Instead they just invest a fixed portion of their paycheck every pay period. This is basically what you do when you have a company match to your 401(k). There's some debate whether this is really a DCA strategy but the effect is the same.

The other strategy which can in theory work better is to do what's called Dollar Value Averaging. With DVA you make a reasonable expectation on how much the stock market should grow over each investment period. For instance you might say that the total market should grow roughly the same amount as inflation + GDP. In this strategy you keep a mixture of stocks and cash and you move cash in and out of your stock portfolio to make it match your expected growth. When the market goes down or doesn't grow as fast as expected you transfer of cash in to make up the difference but when it goes up faster than expected sell off stocks and put it back into your cash. If you do this in a 401(k) account you can usually avoid transaction feeds. It does require a little more vigilance and it's harder to stick to if you get emotional about your money.

A strategy in the middle is to pick an asset mix, say 85% stock, 5% metals, 5% bonds, 5% cash and then rebalance those ratios on a quarter or yearly basis. This way if the stock market is booming you're constantly selling off to maintain the asset mix but if it tanks you have reserves to buy when the price is low.

Check out "The Four Pillars of Investing" by William Bernstein if you want to learn more.

[WestCoast]

(01-26-2014 04:44 AM)MunichSux Wrote:  

The fantastic wealth that giants like Soros, Buffett etc. have amassed is only because year in / year out they had knock out returns (yes, a few down years here and there, but they were rare! ). The magic of compound interest worked for them and those fortunate enough to invest with them because they have the skill to generate returns that are above, often FAR above average returns generated by a passive investment or by peers in fund management industry. It really is that simple.

To believe there's knowledge out there that guarantees you can do it, too, is simply not true. There are and were highly qualified finance professionals who went broke after a strong start (google for "Long Term Capital Management" e.g.).

Dude this is the most facepalm worthy post on the entire thread! Even more so than carguy throwing up an image of Jim Cramer lol.

LTCM and Soros and Buffet all linked up in the same breadth?



Again. Buffet stated diversification is protection against ignorance. He made individual bets (punch card analogy) to make some larger gains. That aside he is also stating you can simply DCA into baskets of companies over the long term to generate returns.

You can't possibly hide the last 100 years. You won't get "above average returns" on sock with DCA. You just get around 6-10 % long term.

Using LTCM which was a hedge fund run with 10x LEVERAGE as "proof" that you can't make money over the long run is seriously LOL.

I am not trying to be a dick I am trying to make sure people don't read your post and take it seriously because it would wreck the financial future of everyone who believes what you wrote.

LTCM and DCA is no where near related bro. Hell some of the ideas from LTCM are used today (William sharpe comes to mind and is used in every hedge fund interview. An important basic concept: http://en.m.wikipedia.org/wiki/Sharpe_ratio ).

Hell the mother fucker who created black scholes was part of LTCM! It's not like nothing of value came from the disaster that occurred.
http://en.m.wikipedia.org/wiki/Myron_Scholes

Anyway. One thing I do want to note, sugar made a comment about DCA with $200 a month that would be a TERRIBLE idea because the fees for each transaction would eat your gains $200 - $5 trading fee = 195... You're down 2.5% already!

You want to make each purchase in the thousands. Look at a $5,000 purchase = $4,995... Down only 0.1%.

Dollar cost average yes, but make sure you don't have the fees eat up your gains. This is also why no matter your financial situation you ALWAYS go to the employer match on your 401K because the match is an automatic 100% return.

[Onto]

There are a lot of ways to make money in this world. Your labor, stock market, real estate, business investment, etc.

People are wired differently. I have never done well in the market while others make good money, but I have done well with investment property. I have one property that returns 9.5% (after expenses). Where else can I get a safe return of 9.5%?

Is there work involved with rentals? Absolutely, that 9.5% doesn't come free, but for me I'm wired for real estate as opposed to equities so I have been successful with it.

I think the best thing a person can do in regards to investing is to figure out what they've been successful with and focus their energy and resource to that.

[blkgatsby]

So, what are good books on investing that I can read right now?

[Capitán Peligroso]

^^^Start with The Wealthy Barber. It will cover the basics.

Here's a great chart that shows what a $1000 graduation gift will return over a certain number of years invested at a certain rate of return. My family has been doing this for generations.

[/quote]

[WestCoast]

(01-26-2014 05:01 AM)Sugar Wrote:  

The main advantage of owning a house or apartment is if your other avenues of revenue dry up YOU CAN LIVE IN IT. I'm unaware of any other investment where you can do that. But as far as making easy money buying property I think the party is over for the average investor, at least in the US.

tl;dr: I've learned a ton from this thread.

Well lets go ahead and test this one out. Lets play a game, queue saw music:

You can have your bachelor pad and live in it. You hand over $300K.

In the 300K house scenario you'll see an annual return of 7%, we assume that cap rate for safety $21K a year you save or $1,750 a month...

or you can open door number two...

Door number two you buy a security today for $300K. It is a simple security that appreciates at 3% per annum and in addition, pays a 4% dividend yield (whattup to all the stocks under SDY)...

You and the saw character are having a beer in your bachelor pad as you're pouring the glass you explain that you no longer have to pay $1,750 a month! Congrats then he hands you a tape recorder that says you should flick on the TV.

There is a strange person on the screen explaining that he is living in Mexico. Paying just $750 in rent per month. (4%*300K)/12... $1,000 a month from just the dividend!

It clicks. The room closes and you realize he is paying for his entire rent with a dividend and does not have to touch the principal either!

How is this any different from owning your own home?

TL;DR: All home "ownership" or apartment "ownership" means is you're covering your cost of living with a sum of cash. If you own the house it simply means you have $X invested in real estate. IF you own a security or bond or whatever that spits out the same return... what is the difference? Nothing.

(yes this is simplistic and everything has a different level of risk, a single stock versus the whole SDY or a single house in a single area etc.)

[cardguy]

So - if somebody own a home - you think they would be better of selling it and buying a security.

And then just start renting each month?

Interesting. I have never considered that before. I am not sure about the US - but the UK is famous for its obsession with home ownership and house prices. So it is interesting to hear something different in this area.

Also - I was curious as to how you find an investing edge? You mnetioned reading about 100 books a year. Does this you pick a field (such as medical science or clean-energy for example) and then spend alot of time reading up on it and trying to spot what breakthroughs are in development?

I read alot myself. And I am curious if I should reconfigure those habits so as to try and profit from my intense love of reading and learning about new areas.

As I said earlier. I want to thank you for your intelligent contributions to this thread. Most of my posts here are the forum are a mixture of opinion and conversation starters. Since I am just as interested in learning why I am wrong, as I am in convincing others why I am right. If that makes sense...

[Days of Broken Arrows]

(01-26-2014 05:31 PM)Capitán Peligroso Wrote:  

^^^Start with The Wealthy Barber. It will cover the basics.

Here's a great chart that shows what a $1000 graduation gift will return over a certain number of years invested at a certain rate of return. My family has been doing this for generations.

[/quote]

Great chart.

This is what I was saying on another thread that asked what we would do if we could be 20 again.

If you simply take $1000 at 20 and put it in a growth stock with a dividend and leave it there, you'll be a happy man at 40. A basic energy stock would do the trick (people are always gonne need energy). Starbucks might work too (4 percent dividend). A call to Scottrade could get you several stock ideas and you could even make two $500 investments. When you add the growth with the dividend, the payoff will be massive.

Why no one told me to do this at 20, I have no idea.

[Ensam]

WestCoast -

Do you know of an equivalent strategy to DCA that will work if I want to unwind a position?

So say I've invested 100,000 it's grown to 1,000,000 and now rather than purchasing the stock for the least amount possible (on average) I want to sell it for the highest amount on average. If do the opposite of DCA and sell it off in equal chunks, say 100,000 per month for 10 months, then I'll be selling more shares when the market is down and less when the market is up - which is the exact opposite of what I'd like to do. My initial thought is that it would be best to sell it in equal quantities of stock but that seems to be only marginally better than selling it in a lump sum.

[WestCoast]

@cardguy Ah i should have clarified think about it like this....

Yes you can make money on property but what does "not having to pay rent mean" what it really means is you invested cash into something so you didn't have to pay rent right? How are the two scenarios any different? They aren't! Unless you made some good gains with the correctly timed leverage of picking up your ARM or 30 year fixed mortgage the example stands.

People seem to ignore entirely that they have $250-500K tied up in the asset in the first place! Its not like that money would be sitting in a checking account dying from inflation right? What is the difference and clearly the answer is nothing.

I am going to echo what i said in the past and ignore any "investing edge" and simply state again that by DCA into SPY you're basically going to get 6-10% according to the last hundred + years and you have no reason to let it sit and rot on the sideline. I would read a few high level books on investing first then we can talk about your specific situation.

[WestCoast]

(01-26-2014 06:36 PM)Ensam Wrote:  

WestCoast -

Do you know of an equivalent strategy to DCA that will work if I want to unwind a position?

So say I've invested 100,000 it's grown to 1,000,000 and now rather than purchasing the stock for the least amount possible (on average) I want to sell it for the highest amount on average. If do the opposite of DCA and sell it off in equal chunks, say 100,000 per month for 10 months, then I'll be selling more shares when the market is down and less when the market is up - which is the exact opposite of what I'd like to do. My initial thought is that it would be best to sell it in equal quantities of stock but that seems to be only marginally better than selling it in a lump sum.

Well the only time you should sell is when you're de-risking your portfolio IMHO. Example i am not going to sell my securities to buy a plane ticket. I am selling my securities because i have X% in stocks and X% in bonds and want to change that to Y% in stocks and Z% in bonds so it would be an immediate sale, settle and repurchase. Rebalancing is rare and happens maybe every 3-5 years so its a non-issue imho to just do it once and change the percentages in a few days.

In fact the opposite of DCA is a one time purchase is it not? So thats how I would do it and personally do it.

Sale, settle, switch. Done close the books.

[Ensam]

I was thinking more what do you do when you actually want to do something with your investments. Presumably there's a larger purpose... say I decide that I want to start my own company and I'm willing to spend a certain portion of my portfolio to do so. For this argument let's assume it's a relatively small portion, so say I have a portfolio of 1,000,000 and I want to take 100,000 out. Now I could just sell it and be done but I don't really need the whole 100,000 today, I need a few chunks over the course of the next year or two. So what I'd like to do is get my money out of my portfolio in a way that minimizes the impact of market volatility on the price I get for it.

[WestCoast]

I would sell the exact amount immediately, then buy CDs that expire on the days you will need them. This way you're 1) no longer exposed to the market and 2) you're now at least getting a small return for the waiting period.

Yeah the return sucks but if you're trying to get rid of volatility the only way to take volatility to zero is to sell. Unless you're time horizon for needing the money is several years then that's one of the safest ways to do it.

[Capitán Peligroso]

Quote:

Why no one told me to do this at 20, I have no idea.

These aspects of financial literacy should be in required classes in high school.

[_DC_]

Put your money in an index like the S&P, take it out during recessions. I was too young or didn't have much saved during the last two crashes, but it doesn't happen overnight. Look at the chart, its really not that hard.

I just pulled my money out of the S&P last week, and alas the extended index was down 2.51% Friday. I think the S&P is up for a major correction, and maybe a crash in a month or year. All this bond buying, shits gonna crash.

If you're feeling as pessimistic as me, buy puts on the SPY every month.

[blkgatsby]

Even though I'm relatively new to the concept of investing, this thread is really helpful in terms of learning actual investment strategies, instead of going with norms that the masses uses (i.e. keeping money in a savings account, buying a house with a 30 yr mortgage, buying stocks based on current trends, etc.). So when you get a security, is the annual dividend cash, or simply built into the security?

[WestCoast]

Bro if you are constantly buying puts I have some aids infected diapers to sell you... Naked dollar cost averaging on a put option?

Warren buffet is known for selling out of the money puts on his net investment to make additional gains.you're basically his customer.

You're bearish that's fine, your strategy is quite dangerous and flies in the face of several major investors.

--

Most dividends are cash, sometimes they reinvest in shares of the index. Generally if you buy a single stock yes you're going to see a cash account addition in your account.

[blkgatsby]

(01-26-2014 07:07 PM)Capitán Peligroso Wrote:  

Quote:

Why no one told me to do this at 20, I have no idea.

These aspects of financial literacy should be in required classes in high school.

It should be, but look at how irresponsible people are as is?

I'm going to go slightly off topic for a bit...

Most people have NO sense of money management, let alone financial literacy. Hell 2/3 of America is living paycheck to paycheck, and are only doing things to make the situation worse and not better. Shit like shopping sprees, dining out all the time, buying a new car every 5 years, buying the maximum amount of house your current income will allow, is bad spending...

....But the economy would be completely screwed without it. It's ingrained in our culture to upgrade our lifestyle whenever we get a pay raise, or save up money only to waste it at the LV store. This aspirational spending is what drives business for most luxury retailers, and not people who are legitimately rich.

Back on topic, giving financial literacy to the masses could possibly be a bad thing.

[DrugAdvisor]

It is exactly the same situation where I am in SEA at the moment with the house ownership. Although things might get fairly more heated up in UK due to low interest rates atm. Its a lot of buying pressure from the advertisements and peer pressure to own a house over here, so significant that I felt so relaxed after being away overseas (Europe) for just 10 days. So I do know what its like...

The point is owning assets that generate cash over the long run beats buying a liability and making it more so by living it. Especially for the single dudes. Instead of treading into the uncharted and unexperienced SPY or SDY territory, you can consider leveraging on whatever experience you have with regards of property. Buy low, fix it up and rent. When you do that over and over, you are certain to yield a positive cash flow from that (while still renting your own place, heh heh). Then your tenants will be paying YOUR rent AND mortgage.

(01-26-2014 06:32 PM)cardguy Wrote:  

So - if somebody own a home - you think they would be better of selling it and buying a security.

And then just start renting each month?

Interesting. I have never considered that before. I am not sure about the US - but the UK is famous for its obsession with home ownership and house prices. So it is interesting to hear something different in this area.

Also - I was curious as to how you find an investing edge? You mnetioned reading about 100 books a year. Does this you pick a field (such as medical science or clean-energy for example) and then spend alot of time reading up on it and trying to spot what breakthroughs are in development?

I read alot myself. And I am curious if I should reconfigure those habits so as to try and profit from my intense love of reading and learning about new areas.

As I said earlier. I want to thank you for your intelligent contributions to this thread. Most of my posts here are the forum are a mixture of opinion and conversation starters. Since I am just as interested in learning why I am wrong, as I am in convincing others why I am right. If that makes sense...

[DrugAdvisor]

As in just long puts every month? Thats like playing the lottery...

Why not just sell OTM calls AND puts monthly LoL

(01-26-2014 07:24 PM)_DC_ Wrote:  

Put your money in an index like the S&P, take it out during recessions. I was too young or didn't have much saved during the last two crashes, but it doesn't happen overnight. Look at the chart, its really not that hard.

I just pulled my money out of the S&P last week, and alas the extended index was down 2.51% Friday. I think the S&P is up for a major correction, and maybe a crash in a month or year. All this bond buying, shits gonna crash.

If you're feeling as pessimistic as me, buy puts on the SPY every month.

[DrugAdvisor]

This is exactly what I did at certain points in the past years with my dividend portfolio, and also *sigh* my wedding banquet. There was a certain chunk of that portfolio I didn't want exposed to the fluctuations of the market and also for peace of mind.

I cashed out that chunk relatively early (6 months beforehand) so I can focus on planning rather than when I needed the amount. Left it in the local money markets yielding 2.2% (at that time. Now its slightly higher heh heh) daily.

(01-26-2014 07:03 PM)WestCoast Wrote:  

I would sell the exact amount immediately, then buy CDs that expire on the days you will need them. This way you're 1) no longer exposed to the market and 2) you're now at least getting a small return for the waiting period.

Yeah the return sucks but if you're trying to get rid of volatility the only way to take volatility to zero is to sell. Unless you're time horizon for needing the money is several years then that's one of the safest ways to do it.

[Tail Gunner]

(01-26-2014 07:24 PM)_DC_ Wrote:  

I just pulled my money out of the S&P last week, and alas the extended index was down 2.51% Friday. I think the S&P is up for a major correction, and maybe a crash in a month or year. All this bond buying, shits gonna crash.

I agree. The equity markets are well overdo for a healthy correction. I foresee a correction in the DJIA to somewhere between 14,000 and 14700.

Such corrections are a normal and healthy part of the equity markets.

[Richiavelli]

Currently I am DCA'ing SCHX. There's no trade commission if you have a schwab account. With .04% expense ratio and no trade fee, I'm probably sticking with this until I build some more wealth. Although it isn't perfectly correlated with SPY, it's pretty damn close.

America is infatuated with buying real estate. The government actually places a fairly high priority on consumers being able to buy homes. This can be seen based on income tax incentives written into the tax code and first time home buyer programs.

Buying a home is pretty risky though. For a one time, price you are going to pick up an asset. SPY and items like it are beautiful because they can be dollar cost averaged, where as property it's a one time price. My personal belief is that you should only pick up a home if you really want to live there for the rest of your life.

Probably most people who visit this forum would err on the side of Westcoast - picking up a security that could be used to pay your rent anywhere would give you the most mobility.

[_DC_]

I mistyped. I meant to say puts about a month out. I've only done it twice now as I feel like the market is ready to fall.

Yes, doing this monthly for the past few years would have been disastrous (the S&P is up almost 40% the past year).

Now is a smart time for some puts in my opinion. Its overstretched and I have a gut feeling next week is going to be down significantly.

(01-26-2014 07:30 PM)WestCoast Wrote:  

Bro if you are constantly buying puts I have some aids infected diapers to sell you... Naked dollar cost averaging on a put option?

Warren buffet is known for selling out of the money puts on his net investment to make additional gains.you're basically his customer.

You're bearish that's fine, your strategy is quite dangerous and flies in the face of several major investors.

--

Most dividends are cash, sometimes they reinvest in shares of the index. Generally if you buy a single stock yes you're going to see a cash account addition in your account.

[reaper23]

(01-26-2014 06:34 PM)Days of Broken Arrows Wrote:  

(01-26-2014 05:31 PM)Capitán Peligroso Wrote:  

^^^Start with The Wealthy Barber. It will cover the basics.

Here's a great chart that shows what a $1000 graduation gift will return over a certain number of years invested at a certain rate of return. My family has been doing this for generations.

Great chart.

This is what I was saying on another thread that asked what we would do if we could be 20 again.

If you simply take $1000 at 20 and put it in a growth stock with a dividend and leave it there, you'll be a happy man at 40. A basic energy stock would do the trick (people are always gonne need energy). Starbucks might work too (4 percent dividend). A call to Scottrade could get you several stock ideas and you could even make two $500 investments. When you add the growth with the dividend, the payoff will be massive.

Why no one told me to do this at 20, I have no idea.
[/quote]

or you could lose all your money.

people always seem to forget about risk/reward