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Dollar cost averaging on fluctating income

Discussion in 'Investing Strategies' started by BuffettTheDog, 24th Jan, 2012.

  1. BuffettTheDog

    BuffettTheDog Active Member

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    I am a firm believer in dollar cost averaging and just had a question about it. Dollar cost averaging requires the person to invest equal monetary amounts regularly and periodically over specific time periods.

    However, in theory, shouldn't a person's salary steadily increase throughout their career (assuming it is a successful one, of course)? If they steadily invest more of their money in their investment fund (e.g. they always invest 12% of their income), they are technically not dollar cost averaging because they are not investing 'equal monetary amounts'. Does anyone know what DCA theory says about this, i.e. the how to dollar cost average with a steadily increasing income?
     
  2. Johny_come_lately

    Johny_come_lately Well-Known Member

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    I think a percentage of your wage is probably the wisest form of investing. At the very least keep your payments up to inflation. eg. January 2012 DCA = $100, inflation = 3.5% : January 2013 DCA = $103.5

    Of equal importance is re-investing your dividends. Then you get expotential growth over a lifetime.




    Johny. :)
     
  3. BuffettTheDog

    BuffettTheDog Active Member

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    Ah okay, that is how our superannuation system is designed right now, isn't it? But if our salary increased faster or slower than inflation, is it still possible to follow a dollar-cost averaging plan?
     
  4. Johny_come_lately

    Johny_come_lately Well-Known Member

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    The reality is most people never get a lump sum (like Lotto), so a salary is their only source of income.

    As their income rises, so does spending habits. By direct debiting weekly pay to investments, the wage owner learns to live at a lower means. After a while, the pay being removed regulary (say 15%), is not missed.

    Have a read of 'The Millionaire Next Door' by Thomas J. Stanley
    It shows ordinary people who spend less than they earn, can build wealth.




    Johny.
     
  5. wdongli

    wdongli Well-Known Member

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    That is very true. However what you can get if you can do and what you really get from what you do, are different matters. You are human and would make human errors in decades if not years.

    Most of believers on dollar cost averaging just have not the mind to do one thing for a few years let alone a few decade. We all are attracted by too many fancies. It is not a matter what you think now but what your behavior in the life and market. When you want to take ease and follow the easy way, such as dollar cost average, you may just want to get easy money. What if the market in darkness for years?

    It needs right mental framework and behavior to fight against our primary instinct. If you could put the efforts and times to update your mind, why don't let you know more about the fluctuation, save before market crashes, and put your saving into the market when no one wants to buy or average their dollars cost anymore?

    Every simple valid market scheme has its tough challenge psychologically. Before we can behave properly in the market, no one could make dollar cost average works. If you can get the right minds to follow the simple scheme, you should not act just as a passive market players since you can do better if you could be active and intelligent.

    Dogs have dogs' life and cats have cats' life. If dogs want the life of cats, guess what would happen. Whom are we first and what we play with what we interest second. Everything is the same and then we get what we can get only!
     
    Last edited by a moderator: 26th Jan, 2012
  6. BuffettTheDog

    BuffettTheDog Active Member

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    Thanks, your opinion is appreciated.

    Completely agree. It's a psychological thing - you will learn to stretch your money further.

    I have seen this book mentioned everywhere, including Amazon reviews on unrelated books and Peter Thornhill's reading list. I am looking forward to obtaining or borrowing a copy very soon.