I noticed there are increasing number of questions about HOW to enter the market given the current market downturn, I feel that the general sentiment is still bullish and everyone just wants to get a piece of the bargain. This could be similar to the “Apr2020 Renaissance”, except this time people wants to get in there before the crash rather than trying to catch a rising wave.
For me, I have two psychological barriers — (1) WHEN to enter and (2) HOW to enter. WHEN is the classic timing vs time in, HOW is also another classic DCA vs lump sum. Long story short, I did some back tests and thought experiments, and will now share the outcomes here for your reference and comments:
- I use weekly close price from 03-Feb-2020 to 31-Jan-2022. This period has two ATHs and one 30% dip.
- I allocated $52,000, just enough to cover 104 weekly @ $500 per week.
| SPY | DCA Weekly $500 | DCA Monthly $2,000 | Lump Sum $52,000 |
|---|---|---|---|
| Final Shareholding | 142.22 | 141.08 | 156.53 |
| Average Cost | $368.23 | $368.57 | $332.20 |
DCA weekly vs monthly has negligible benefit of less than 1%, but the effort is 4x more. You might be able to get by with automated DCA, but there may be other costs/risks (e.g. a missed trade due to system error) which could easily negate its slight benefit.
Lump sum is the winner here. This is expected and mathematically simple. There are always more ATHs than dips, and the market stays in lows a lot shorter than it does making new highs. In the 104 weeks I tested, SPY took 23 weeks to recover, which means you only had about 22% of the time to average down, and about 70% of time paying more.
So, NOW is always the good time to go LUMP SUM. Please note that this is about SPY, not individual stocks. Please do not lump sum in [whatever ticker] today without doing your DD!
Now let's move on to timing the market. This is my own thought experiment, because I feel that I always buy too high or miss good bargain. Admittedly with the help of hindsight, I could be more bullish than I would have been, but I will try to follow my rules, which are:
I will be doing DCA of $500 weekly. If there is a 10% drop, I will double my DCA. If price movement is stable, but my average cost is still higher than the current price, I will use the same entry amount to average down.
| Date | SPY Close | Invested |
|---|---|---|
| 03-Feb-2020 | $332.20 | $500 |
| 10-Feb-2020 | $337.60 | $500 |
| 17-Feb-2020 | $333.48 | $500 |
| 24-Feb-2020 | $297.46 (-10%) | $1,000 |
| 02-Mar-2020 | $297.46 | $1,000 |
| 09-Mar-2020 | $269.32 (-10%) | $2,000 |
| 16-Mar-2020 | $228.80 (-15%) | $4,000 |
| 23-Mar-2020 | $253.42 | $2,000 |
| 30-Mar-2020 | $248.19 | $2,000 |
| 06-Apr-2020 | $278.20 | $500 |
So on 02-Mar-2020, I would stick to the same amount as 24-Feb-2020 since the price was about the same. On 23-Mar-2020, price started to climb back, but my AVG of $262.93 was still higher than $253.42, so I referred back to my 09-Mar-2020 invested amount of $2,000. By 06-Apr-2020, my AVG was $259.21, so $278.20 was no longer a “bargain”, so I switched back to $500 DCA. I would have exhausted my $52,000 earlier on 20-Sep-2021.
The outcome? 157.73 shareholding @ AVG $329.69. It's less than 1% benefit from the lump sum method! As you can see, the window of opportunity was very small, I would only be able to double-down 6 times (out of 104 weeks).
What would you do? Do you have a set of rules to trigger and guide your entry timing and amount?
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