TimingCube - Dollar Cost Averaging explained - dollar cost averaging,mechanical trend,between signals,market force,higher highs

This week's Update is one of finding a healthy balance between being aggressive enough to participate in the market when our gut tells us to wait, and yet keeping our feet firmly planted on the ground instead of taking foolish risks. Enjoy.

Signal Update

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500
		QQQ

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500
QQQ

Note: QQQ returns are included for continuity sake.

Market Update

It's been another seesaw week for the markets. Major indices moved higher on Monday, only to retreat on Tuesday, supposedly on fears that higher interest rates are on the horizon because of the strong economy. After markets recovered on Thursday, they got spooked again on Friday, this time because of a weak employment report that implied that the economy is not so strong after all! The action resulted in a small weekly gain of 0.18% for the Nasdaq-100. The Russell 2000 and the S&P 500 fared better, as has been the case for over a month, finishing the week near their 52-week highs with gains of 2.39% and 1.04%, respectively.

Our current Buy signal remains in effect.

Trend Timing School

Dollar Cost Averaging explained

This Trend Timing School editorial may as well have been entitled "Why and how to get 'in-sync' with the signal, now!"

Our mechanical Trend Timing Model gives us clear cut directions to enter the market with Buy signals, and for when to exit - or sell short - with Sell signals. As highlighted last week with the recent subscriber survey results, it seems like the most difficult aspect of our timing system is to decide when and how to invest between signals. This applies to both new subscribers starting some months after the previous signal was issued, and to the ones that for some reason failed to act when the signal came. Longer term Trend Timers on the other hand have been in step with the signal for some time and, if so lucky as to be at the receiving end of a tax refund check or a bonus, they would not hesitate to commit new money mid-signal.

When arriving mid stream, the natural tendency for many is to conclude that, because of the time elapsed since the previous signal, the next one must be near, and therefore we should wait. During a Buy signal we fear that we are near a top, that the market is overvalued, or we rationalize that since the signal has been active for so many months, the probabilities of a Sell signal being near are high. Well, we are sorry to differ, but as explained in the , when - as now - we have a Buy signal during a Bull market (Quadrant 1), we know that the predominant market force is bullish, that any weakness is likely to be of a relatively short duration, and small enough so as to not trigger a signal. The most likely next step is for the bull market to resume its upward movement. A quick glance at the current Buy signal shows that during the nine months since it has been in force, we have experienced numerous pull backs, including 9 between 4% and 7%, and none of them have proven to be trend changes. Instead, since every one was followed by a rebound to higher highs, they in fact represented good buying opportunities.

We don't know when the next signal will come and, as always, we will let the market and the Model tell us when a trend change occurs. In the mean time we get in step with the current signal because if we don't, not only could we miss substantial profit opportunities, but more importantly, we risk waiting on the side lines so long that we lose patience and fall off the wagon before even trying.

All of this gets us back to the original subject of this editorial: Dollar Cost Averaging. This is a fancy term for a very simple and widely respected method of optimizing the investment entry and minimizing the downside risk. Instead of committing the entire amount we are prepared to invest in one single lump sump, we invest it in a series of smaller fixed dollar amounts over a period of time.

In the example below, a $10,000 sum can be invested upfront as a lump sum, for 1,000 shares at $10 each. Or, with Dollar Cost Averaging, the $10,000 is divided into 5 installments of $2,000 per week, for five weeks. There are three possible scenarios, the market goes nowhere and bounces around, the market goes down, or the market goes straight up. In the first two scenarios you are substantially ahead with Dollar Cost Averaging.

Dollar Cost Averaging

Initial Lump Sum

Ending Values after Week 5

Week 1

Week 2

Week 3

Week 4

Week 5

Total Number of shares

Average cost

Value of investment

Market bounces around

Price

$10.00

$15.00

$10.00

$5.00

$10.00

Shares purchased

200

133

200

400

200

1133

$8.82

$11,330

$10,000

Market goes down

Price

$10.00

$8.50

$7.50

$6.50

$5.00

Shares purchased

200

235

267

308

400

1410

$7.09

$7,050

$5,000

Market goes up

Price

$10.00

$11.50

$12.50

$13.50

$15.00

Shares purchased

200

174

160

148

133

815

$12.26

$12,225

$15,000

Why is Dollar Cost Averaging so effective?

It reduces the risk of buying everything at the wrong time. If the market decides to go down and a Sell signal is triggered in the near future, we have less exposure, and the Sell signal protects us from excessive losses
We get a better price because the fixed dollar amount buys us fewer shares when the price is higher and more shares when the price is lower
It provides us with a mechanical and unemotional method to get in step without all the hesitation and second guessing

And in the end, if the downside risk still looks too ominous, nothing prevents you from setting your own stops at a tolerable percentage. Make sure you don't set them too tight or you might get stopped out too early. Remember that the Trend Timing philosophy can only help you build long term wealth if you adhere to it.

FAQ of the Week

Question: In light of impressive results, how much leverage should I use?

Many subscribers review our historical results and point out that for most periods the leveraged strategies - "Long Only with Margin" and "Long & Short with Margin" - have outperformed the non-leveraged strategies. From here, there is only a tiny step to asking "should I invest everything in the "Long & Short with Margin" strategy?" Hold on to your hat, we even get asked if it is possible to purchase the "double" or "double inverse" mutual funds on margin, such as RYVYX or RYVNX funds in the Rydex family (see our "Our Service" page)!

Just because you can does certainly not mean that you should. We cannot tell anyone what to do, and you need to decide for yourself what risk level you feel comfortable with. For our own investments and our own taste, the implications of such questions ranges somewhere between hair raising and outright lunacy. Leverage is a very powerful and potentially dangerous tool. As an example, say our positions decline by 10% from the most recent top before a signal is issued, a leveraged fund would lose 20% or more, and someone who bought the leveraged fund on margin stands to loose 40% or more! If this is not scary enough, we could remind you that during the 1987 crash the Dow Jones lost 22.6% IN ONE DAY. If your are leveraged by a factor of four, that is a nice round 90% loss! We don't know if our Model would have triggered a Sell prior to the crash or not (not all data we need to run our model is available that far back), but these are definitely not odds we want to test with our own money. And neither should you.

One example of strategy blend we would deem reasonable for our own investments is 80% in the "Long & Short" strategy and 20% in the "Long & Short with Margin" strategy. But that's just us.

Warm wishes and until next week.

The TimingCube Staff