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Improved Dollar Cost Averaging
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Improved dollar cost average (SACIN) purchases securities for a lower average cost. Just as the performance of the SACOUT® method can be improved by selecting a lower Ko, the performance of Dollar Cost Averaging can be improved by a similar technique embodied in the SACIN® (Securities Average Cost IN) method. Instead of investing a fixed dollar amount per period, the SACIN® method uses a formula to automatically purchase more shares than DCA when the price is low and fewer when the price is high. Again the user inputs required are: A, the nominal dollar amount to be purchased per period Pb, a base price either today's price or what you think the average price will be over the purchase period. When the price p equals the base price Pb you will buy the nominal dollar amount, A. Ki is a gain factor. Making Ki zero measures up from zero just as dollar cost averaging does and will purchase A/p shares per period as DCA does. Making Ki=0.5 (the default value) will produce about twice the benefit (difference between average share price over time and average cost per share) that DCA does. It does this by measuring up from Pb/2 so that the variations in price look bigger. The SACIN® method (patent #7,003,483) will purchase a variable dollar amount per period. This is best handled both for the SACIN® and SACOUT® methods by using them to make cost free transfers between a variable fund and a cash equivalent fund within your account. This is now routinely done to gain the benefit of dollar cost averaging when investing a lump sum. The first few periodic investments would be put into the cash fund. Then, after a few periods, use the SACIN® method to make transfers to a variable product such as a stock or growth fund. Similarly, use the SACOUT® method to make periodic transfers to a cash fund and then take periodic withdrawals from the cash fund. You might want to stay ahead when making mandatory withdrawals from an IRA to avoid avoid having to take a large withdrawal at year-end to meet IRS requirements. After using these techniques for a period of time, one will look back and ask, did I really do better than other options? The answer will probably be no. I could have done better if I had made a single transaction on some date. This is hindsight and we all would be rich if we could make trades in hindsight. The SACIN® and SACOUT® methods are designed for those who want to do better than current practice without becoming involved in market timing. Sacco Company, Inc.
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