A Slacker’s Guide to Programming
Do Dollar Cost Average really work?
Apes Together Strong
Introduction
Huge Disclaimer: The information in this post is not intended to be and do not constitute financial advice.
The motivation for this article started after I watched this video on Youtube. (start 4:40)
It sounds too good to be true. The audacity!
How is it possible that a hands-off approach to investing could generate reasonable ROI?
This will never work. Just ask the folks at r/wallstreetbets.
Thus started my crusade to disprove Mr Chicken Genius's bold claim on the effectiveness of Dollar Cost Average.
So what is Dollar Cost Average?
I first heard of the term "Dollar Cost Average" years ago when I dipped my toes in Exchange Traded Funds (ETFs).
The basic concept is that instead of a lump sum, you invest fixed amounts at regular intervals into a chosen asset.
By building your position over time, it can potentially lower your investment costs and mitigate risk.
What Is Dollar-Cost Averaging (DCA)?
It's meant to be a passive investment strategy, but could it really yield better ROIs when compared to other popular trading strategies?
Buy High Sell Low
I developed a simple Dollar Cost Average Calculator with historical data extracted from Yahoo Finance.
The calculator was then used to visualise the effectiveness of Dollar Cost Average when matched against four other popular technical analysis indicators.
-
Bollinger Bands
- This strategy triggers a buy signal when the upper band of the 20-period moving average crosses above the lower band of the 20-period moving average and vice versa.
-
Relative Strength Index (RSI)
- This strategy triggers a buy signal when the RSI value falls below 40 and a sell signal when the RSI value hits above 60.
-
Moving Average Convergence Divergence (MACD)
- This strategy triggers a buy signal when the MACD line crosses above the nine-day exponential moving average (EMA) and a sell signal when the MACD line crosses below.
-
Super Trend
- This strategy triggers a buy signal when the Super Trend close below the share price and triggers a sell signal when the Super Trend close above the share price.
Dollar Cost Average Calculator
These results were based on a 5-year time frame from October 28, 2017, to October 28, 2021, with a monthly investment amount of USD100.
| Strategy | Total Shares Owned | Market Value (USD) | PnL |
|---|---|---|---|
| DCA | 66.36750 | $9,913.24 | ▲ $5,713.24 |
| Bollinger Bands | NA | NA | ▲ $106.61 |
| RSI | NA | NA | ▲ $9.94 |
| MACD | NA | NA | ▼ -$55.10 |
| Super Trend | NA | NA | ▼ -$82.46 |
| Strategy | Total Shares Owned | Market Value (USD) | PnL |
|---|---|---|---|
| DCA | 11.35215 | $7,559.23 | ▲ $3,360.08 |
| Bollinger Bands | NA | NA | ▲ $57.34 |
| RSI | NA | NA | ▲ $342.71 |
| MACD | NA | NA | ▼ -$555.45 |
| Super Trend | NA | NA | ▼ -$585.54 |
| Strategy | Total Shares Owned | Market Value (USD) | PnL |
|---|---|---|---|
| DCA | 45.05920 | $47,135.52 | ▲ $42,935.52 |
| Bollinger Bands | NA | NA | ▼ -$459.02 |
| RSI | NA | NA | ▲ $243.75 |
| MACD | NA | NA | ▼ -$361.89 |
| Super Trend | NA | NA | ▼ -$309.41 |
| Strategy | Total Shares Owned | Market Value (USD) | PnL |
|---|---|---|---|
| DCA | 450.16160 | $78,107.54 | ▲ $73,907.54 |
| Bollinger Bands | NA | NA | ▲ $162.79 |
| RSI | NA | NA | ▼ -$121.53 |
| MACD | NA | NA | ▲ $136.64 |
| Super Trend | NA | NA | ▼ -$46.47 |
Conclusion
The numbers don't lie.
Dollar Cost Average outperforms all the other technical analysis indicators consistently by a wide margin.
Even God Couldn’t Beat Dollar-Cost Averaging.
In my quest to invalidate Mr Chicken Genius's claims, I became the Donkey.
