I am not a financial planner or investment professional of any sort, so you will need to take what I have to say for what it is worth.

There are a lot of different things you want to take into consideration when buying anything in the stock market, but the thing you want to think about the most is value. I would always recommend investing when you think there is value to be had so if you think that this bond fund only has value once it hits a certain price then I would say that you should only buy it once it hits that range.

That is certainly the philosophy that I think is right, but I honestly don’t have very many tools to determine when something is a “value” or not. I am currently seeking to get educated on that topic, but as of today I would have to honestly answer that I don’t know how to determine value on the stock market.

So your guess is a good as mine as to whether or not the Pimco Total Return Bond Fund is worth dollar cost averaging into or holding off and investing a lump sum once it hits a certain price point.

http://finance.yahoo.com/echarts?s=PTTRX

I think Stewart your strategy of investing lumpsum everytime the fund hits $10 might be give a better return than DCA.

what are your thoughts. This fund seems to be gyrating between its ranges depending on interest rates over a long long period of time

First off, I think you are right in saying that lump sum investing is better than DCA when it comes to upward trending markets. This makes sense because with lump sum investing you are locking your buy in at a really low price as the market rises. Dollar cost averaging doesn’t benefit from this because it spreads its purchases out over time and will probably buy in at higher prices than the lump sum investor would.

We are in total agreement here, I think.

I think what I was trying to do in my post and in my comments is to show a similar sub-optimal relationship between dollar cost averaging in a declining market. Here is where I tried (but obviously not well enough to be clear or convincing) to show this:

If I had invested a lump sum of money, lets say $12,000, at the beginning of this decline [beginning in October 2007] into a low cost index fund that tried to mimic the returns of the S&P 500, I would have suffered a loss of $4,724.40 (-39.37%) – and assumes an expense ratio of 0%. If I had dollar cost averaged in this market I would have lost less than that, but I still would have lost $4019.11 (-33.49%) if I had invested $1,000 on the first trading day of every month.

The similarity between the terribly performing lump sum investing and dollar cost averaging in this example gives me pause in considering DCA as a valid bargain buying opportunity, especially if it is done through index investing.

Obviously hindsight is 20/20, so I’m not saying that we should never DCA – it’s just that if we think things might have farther to fall it seems like a good idea not to DCA so that we can be better poised to take advantage of an expected “return to normal.”

Now to your brilliant tuna example. It think that this is a very useful way to think about this and found it very helpful to me, so thank you very much for offering it. When I think about the way that most people Dollar Cost Average I think that they do so into a mutual or index fund. A paycheck comes and whamo – buy some additional shares in the index fund (since they are a long term investor).

To me this DCA index investing is more like buying 500 products at the grocery store than it is like only buying cans of tuna. Sure you will buy some cans of tuna that are on sale when your paycheck comes, but you are also going to be buying cereal, Gatorade, french toast sticks (*drool*), maybe a romance novel, a Slim Jim (for the protein, of course), etc. While tuna might be a slammin’ deal right now all the other stuff that you just bought is really over priced. The supermarket’s loss leader did its work, getting you to buy expensive things when all you wanted was the rippin’ deal on tuna.

By all means buy the tuna while it is on sale, even if the price will continue to go down on its already low, low price. I just think that buying the cereal et al. should be avoided if you think that they are over priced right now.

Does that make my position a little better presented or am I still a babbling, incoherent madman?

If I thought stocks had hit bottom, wouldn’t I be better off lump-sum investing, rather than DCA? If they’ve truly hit bottom, then this would be the cheapest I could get them, so I should buy as many as possible right now, to get the best deal.

But if they haven’t hit bottom, I don’t want to lump sum invest, because I might be able to get them later, at a cheaper price. So DCA works in my favor, because I buy some now, and if I’m right about it going lower, I buy some later for even cheaper. If I’m wrong about it going lower, I’m still good because I bought some while it was at rock bottom, and got a good deal then.

But if this is rock bottom, and I put my money into a savings account instead, then I’m missing out on the big sale.

I always thought DCA had it’s disadvantages in an up-market. That is, you’re buying the same thing over and over again (a mutual fund, stock, or index fund), but at an iincreasing price each time. It’s like going to the store and buying canned tuna every week, but every week the price goes up. At the end of a year, you have 52 cans of tuna that are all exactly the same, but the first one was far cheaper than the last one. You would have been better off buying them all at the start of the year, when they were cheap.

On the flip side, if you’re buying tuna that keeps going down in price every week, you’re happy. Each week you buy another can, because you don’t know when this crazy sale will end and the price will start to go back up, but you’re getting your tuna cheaper each week. Now, lump-sum would be buying a ton of tuna when you thought the price couldn’t go any lower. That’s smart – if you can tell exactly when that week is. And of course, the supermarket won’t tell you!

Sorry if my tuna analogy got out of hand here!

I guess what I was thinking was this – that investing now is good if you pick up specific stocks that are slamming deals but not if you decide just to buy because it is Tuesday, or the fifteenth of the month.

It is my understanding that dollar cost averaging locks a person into buying stocks (but mostly mutual funds of one variety or the other) in this fashion, and for this reason it seems like sub-optimal investing during our topsy turvy downward moving market. Madame X over at My Open wallet lamented something similar in discussing frustration over stock market gains at just the wrong time. While this is isn’t as big of a deal in a lateral moving market (IMO) it is bad in a downward moving one because no matter what price you buy it it will probably be sub-optimal.

Also, as to your point about being concerned with the long term, I think I view the long term as many different short terms added together. If I hamstring my efforts to capitalize on the bargains that do exist by investing broadly into an index or mutual fund with dollar cost averaging while a market is in decline I will be hurting my returns in 30-40 years. Wise short-term investing now will reap benefits in the long term.

Taking losses for no good reason can be devastating to a portfolio over the long term. Brip Blap did a good job of discussing this in a post about how long it will take his index fund portfolio to recover from recent losses.

But, if you think we have hit bottom then I would think that dollar cost averaging might be a good idea. Since I don’t think we have yet (just a hunch, no real information on this one), it seems best to avoid unnecessary loses.

What I’m saying is that I don’t understand your reasoning, but I believe the problem is that you’re showing this in too short of a timeframe. Personally, I wouldn’t care what my investment is worth at the end of the year – I’m looking to see what it’s worth in 30 or 40 years.

You make an ad hominem attack, which has no merit in reasoned discourse and makes no sense whatsoever.

Let me address what I can guess is your objection to my thoughts on this since it wasn’t positively stated – guessing when the market will bottom out is bad and too risky so you should keep pumping cash into the market as it declines in case it rebounds very quickly, dollar cost average ftw!

To answer this objection I would respond with the following – you don’t have to guess too well to do better than dollar cost averaging. This is pretty common knowledge among academic investors who are very critical of dollar cost averaging as a whole. By and large, dollar cost averaging returns inferior returns than lump sum investing, just check out this article:

http://www.moneychimp.com/features/dollar_cost.htm

But back to your “perfect timing” objections. I was suggesting that it seems wisest to me to maybe be a little cautious during these times and maybe wait until you have signals from the market that things are stable again. This could take months to see. During the interim, selective buying is a good idea (in my opinion) and would enable you to pick up sweet deals on stocks that are being battered for no reason. But it seems wisest to me to avoid broad based buying in the form of index investing because I think the market may have farther to fall.

This is my main assumption and I could be wrong. You might not make the same assumption. Or you might, but are unwilling to change your investing habits based upon your own assumptions. I recommend that you look at the numbers and see if my thoughts make real-life, practical sense. If they don’t, feel free to tell my why so I can rethink things and become better for it. You will be helping me, and people who read what I say, out.