1989issue C051-7
Testing dollar-cost and scale-in averaging as position-sizing procedures
Scheduled averaging can be tested as a position-sizing procedure rather than a market forecast. One rule deploys a fixed cash amount at each review date. The other sizes a scale-in or scale-out so marked equity follows a planned rising path. Score those procedures by the cash-flow events they force.
- Dollar-cost averaging deploys a fixed cash amount into one preselected holding at regular intervals and typically reinvests distributions.
- A scale-in position rule adds or trims the holding so marked-to-market equity rises by a pre-set equity-path increment at each interval.
- A cash-budget reserve parks unused monthly budget in a short-term cash vehicle and is drawn first when the next required contribution exceeds that period's budget.
- As an editorial matter, score the procedures by unused budget, extra assessments after declines, and share sales after advances, not by a single surplus-versus-contributions snapshot.
Two contribution rules
A dollar-cost averaging rule requires choosing one security and investing a fixed cash amount in it at regular intervals, usually monthly, with distributions typically reinvested.
A scale-in position rule instead requires holdings equity to increase by a fixed dollar amount, the equity-path increment, at the same regular interval. The next trade is sized from the gap between current market value and the planned equity level.
How the fixed-cash rule behaves
The fixed-cash rule is described as buying more shares during lower phases of a price cycle and fewer shares during higher phases. That description depends on cyclical price behavior plus cycle participation through at least one cycle, rather than a single price regime.
How the scale-in rule sizes the next trade
If price is unchanged and no distribution is received, the scale-in contribution equals the planned increment. A price rise reduces the purchase or triggers a sale. A price decline raises the purchase.
Under the scale-in rule, a sharp decline can exhaust the cash-budget reserve and force a purchase larger than the monthly budget. Later advances can produce share sales and rebuild the reserve.
The cash-budget reserve
A cash-discipline overlay sets aside each month a budget equal to the planned equity increment. Unspent cash is parked in a cash-budget reserve held in a money-market vehicle. Extra out-of-pocket funds are used only after that budget and reserve are exhausted.
Fees and the comparison window
Sales charges or brokerage fees increase the cash that must be committed. Fees may also apply to reinvestment or withdrawal.
The archive comparison used two diversified funds and a monthly budget over a window that included an advance, a decline, and a recovery. For the load fund, the calculations included a sales charge and assumed no charges on reinvestment or withdrawals. The evaluation also compared both averaging procedures with contemporaneous taxable money-market fund yields over the same calendar window.
All readings on this track · 11 readings
- 1989Testing dollar-cost and scale-in averaging as position-sizing procedures
- 1994Quality screens and dividend-yield regime maps
- 1998Cash recovery grids for residual share construction
- 2001Building custom stock baskets with weights and averaging
- 2012Evaluating dollar-cost averaging as an entry-slot procedure
- 2013Treat a short-term valuation oscillator as an entry-timing filter
- 2014Equal-dollar staging versus lump-sum and residual scaling
- 2015A fund pick is unfinished until cost-drag and the mix are tested
- 2016Broad index allocation, a cash reserve, and staged entries
- 2017Call-ratio overlay versus averaging down on a losing stock
- 2019Overfunding smaller index futures to set leverage