Dollar Averaging - Good or Bad?

[roland]

I've just noticed on another stock forum that most are heavily against cost averaging and wondered what ASF members think of this tactic and whether it has worked for them or not.

Just recently, I have noticed that this method is no longer working for me. In fact all it is doing is reducing my capitol base and amplifying losses.

I'm finding it challenging not to cost average and to put the stock into a bottom draw, or just to bail.

There are some obvious answers to this technique and it would relate to the quality of the investment and future prospects.

In hindsight, it is easy to see the mistake of this procedure if the SP continues to fall - of course, much better to buy at the bottom.

Have others found more success in bailing, then to buy back at the lower price, or to hold the original investment and add?

Something that muddies the water is the issue of a stock that has a decent dividend yield. As the SP falls the dividend yield percentage often improves. I have found that long term holds, such as my managed funds do in fact give me a chance at improving my dividend yield which adds to the compounding effect of re-investment.

Then of course we have the threat of the SP falling so far that the dividend yield percentage is no longer achievable by the company we have invested in and the playing rules are changed under our feet.

I'm not really doing very well here with this bear market and look forward to some comment.

 

[SGB]

Re: Dollar Averaging, Good or Bad?

I've just noticed on another stock forum that most are heavily against cost averaging and wondered what ASF members think of this tactic and whether it has worked for them or not.

Just recently, I have noticed that this method is no longer working for me. In fact all it is doing is reducing my capitol base and amplifying losses.

I'm finding it challenging not to cost average and to put the stock into a bottom draw, or just to bail.

There are some obvious answers to this technique and it would relate to the quality of the investment and future prospects.

In hindsight, it is easy to see the mistake of this procedure if the SP continues to fall - of course, much better to buy at the bottom.

Have others found more success in bailing, then to buy back at the lower price, or to hold the original investment and add?

Something that muddies the water is the issue of a stock that has a decent dividend yield. As the SP falls the dividend yield percentage often improves. I have found that long term holds, such as my managed funds do in fact give me a chance at improving my dividend yield which adds to the compounding effect of re-investment.

Then of course we have the threat of the SP falling so far that the dividend yield percentage is no longer achievable by the company we have invested in and the playing rules are changed under our feet.

I'm not really doing very well here with this bear market and look forward to some comment.

Yes roland,

I will never Dollar Cost Ave again on a Small Speck Play.

I’m too embarrassed to name the stock, but I first bought it about this time last year and instead of letting it go for an early small loss, my ego forced me to hang onto it because I didn’t want to be proven that I had made a mistake.

As the year went on I continued to buy small amounts and eventually sold all of the parcels last week for a 20k loss.
I’m not sure how a blue chip would go but I defiantly wouldn’t be recommended it to smaller caps.

Lesson learnt. I now accept that being wrong every now and again is o.k. and protecting capital is more important than having a bruised ego.

SGB

 

[So_Cynical]

Re: Dollar Averaging, Good or Bad?

Averaging is fine as long as u are picking the right stock at almost the right time, i imagine that
many have been burnt buying 4 or 7 weeks ago only to see XYZ fall back to near 52 week lows.

 

[brettc4]

Re: Dollar Averaging, Good or Bad?

I think it depends on your goal for the stock.
I you are holding long term, really long term 10+ years and are looking at primarily income from the dividend, Dollar Cost Averaging can work provided the stock goes up over the long term, which history tells us it should.

For a short or medium trade, I don't think it is the best way. You should have had your exit strategy in place from the start.

Brett

 

[SGB]

Re: Dollar Averaging, Good or Bad?

I think it depends on your goal for the stock.
I you are holding long term, really long term 10+ years and are looking at primarily income from the dividend, Dollar Cost Averaging can work provided the stock goes up over the long term, which history tells us it should.

For a short or medium trade, I don't think it is the best way. You should have had your exit strategy in place from the start.

Brett

Yes see ya point Brett,

But my point would be now is how do you know what a good stock is these days?

2 years ago I was trading CNP for around 6.00, BNB around 18.00,

Do you continue to DCA BHP on todays price?

For me now its about stoploss, but having said that each to their own and I respect what ever strategy you use.

cheers

SGB

 

[brty]

Hi,

Dollar cost averaging can work on a portfolio of stocks, or an index fund. However on any individual stock it is a gamble.

To buy more of an individual stock as the price declines, usually means that you do not have a exit strategy should the brown stuff hit the proverbial.

The example I love best is Pasminco, a good large miner with a fantastic asset in the century zinc mine. Management 'managed' to lose billions hedging, the share price slowly eroded from ~$2 to a few cents when it was liquidated. I knew people who 'averaged' their price all the way down to zero.

brty

 

[tech/a]

Strange isnt it---human nature.
The natural instinct in quantifying a bargain.

When infact adding to positions which are powering ahead are by far the safer more profitable option.
In my experience

Currently

GCL
FLX
MCC

Over the years.
Ones I quickly remember being involved in.

QBE
ASX
ALL
UTB

 

[cuttlefish]

I don't agree with dollar cost averaging. I do agree with accumulation around technical support points for building larger long term fundamental positions and also reduction if price falls through technical support points with a view to increasing again at lower prices.

(with all the fundamental criteria and any related news being the overriding factor).



For a long term fundamental investor the worst thing to do imo is accumulate/average down after bad fundamental news. Don't sit there holding and hoping and adding more money as your dog grows more and more fleas.

Before adding to a losing position, also consider trying the psychological exercise of selling your entire holding and then buying it straight back - you might find that once you've sold it you see the stock in a different light and decide to put your money elsewhere. (of course this could be a risky thing to do if the stock is volatile, or your position is large compared to liquidity, or there is news imminent etc.).

 

[Julia]

For a long term fundamental investor the worst thing to do imo is accumulate/average down after bad fundamental news. Don't sit there holding and hoping and adding more money as your dog grows more and more fleas.

Colourful expression, Cuttlefish! Hope it helps drive the point home.

 

[MichaelD]

The problem with dollar cost averaging is that it only works when it works. When the stock you are averaging down keeps on going down...and down...and down...and never recovers, your capital takes a fatal or near fatal hit.

"The market can stay irrational longer than you can stay solvent"

(Or to put that another way - if trading conditions over the last 12 months haven't convinced you that dollar cost averaging is unwise then nothing will).

 

[Temjin]

Like brettc4 said, the dollar cost averaging technique would only be suitable for those who are looking to invest in a basket of shares in the long term. Therefore, are mostly suitable only to most mums and dads who CANNOT and DO NOT have the skills/experiences to time their trade, nor the psychological build up to do it as well.

I.e. That means most average ppls out there.

 

[cuttlefish]

Colourful expression, Cuttlefish! Hope it helps drive the point home.

thanks! me too - and no offense intended to the living breathing four legged variety!

 

[kenny]

I've never quite understood the advantage of Dollar Cost Averaging.

The usual Managed Fund sales spiel of regular contributions into the market theoretically meaning one doesn't hopefully miss out on the best recovery days which are the ones that drive the long term returns.

But regular contributions regardless of market forces or external factors seems as illogical as buying according to a regular timing interval irrespective of price.

I assume the regular additions are using funds assigned to equities as part of an asset allocation strategy. Sometimes Cash or other asset classes are more compelling as investment options.

At the end of the day, with my fragile psyche at work, an exit strategy as simple as a stop loss means "Sleep at Night" sanity.

Cheers,

Kenny

 

[So_Cynical]

I don't get u guys..seriously there more to making money in shares than the
simplicity of the stop loss/cut and run mentality.

for example my trades in CPU or the last few months...entered into on the assumption
that at under $8 a share it was good (value) buying.

31-01-2008. BUY CPU (300 @ 7.92)
it fell further...i brought more.
07-02-2008. BUY CPU (300 @ 7.65)
3 and a half months later.
23-05-2008. SELL CPU (475 @ 9.61)
left the profits in.

Can someone explain how this is a bad thing.

 

[roland]

I don't get u guys..seriously there more to making money in shares than the
simplicity of the stop loss/cut and run mentality.

for example my trades in CPU or the last few months...entered into on the assumption
that at under $8 a share it was good (value) buying.

31-01-2008. BUY CPU (300 @ 7.92)
it fell further...i brought more.
07-02-2008. BUY CPU (300 @ 7.65)
3 and a half months later.
23-05-2008. SELL CPU (475 @ 9.61)
left the profits in.

Can someone explain how this is a bad thing.

I think the point most were making was that it is good when it works and bad when it doesn't - well, that makes sense.

I could give you an example where it didn't work. Without a list of buys, I followed BBP down until I sold and made a hige loss. Even now it hasn't recovered.

The thread here was to field experiences with dollar averaging and the results are as expected - on a good stock, it works well as in your case, on a dog stock it may or may not work, depending on your financial ability to follow it down and the ability of the stock to turnaround.

I guess one resultant "bottom line" is, yes it will reduce your overall cost of per share value - but depending on the stock, it may not be a good strategy.

 

[tech/a]

I don't get u guys..seriously there more to making money in shares than the
simplicity of the stop loss/cut and run mentality.

for example my trades in CPU or the last few months...entered into on the assumption
that at under $8 a share it was good (value) buying.

31-01-2008. BUY CPU (300 @ 7.92)
it fell further...i brought more.
07-02-2008. BUY CPU (300 @ 7.65)
3 and a half months later.
23-05-2008. SELL CPU (475 @ 9.61)
left the profits in.

Can someone explain how this is a bad thing.

SURE

Let us in on the next 10 your involved in using the same strategy.
In REALTIME.
You'll be glad to know that it will become SELF explanatory.


Sorry if I seem Cynical!

 

[AlterEgo]

I don't get u guys..seriously there more to making money in shares than the
simplicity of the stop loss/cut and run mentality.

for example my trades in CPU or the last few months...entered into on the assumption
that at under $8 a share it was good (value) buying.

31-01-2008. BUY CPU (300 @ 7.92)
it fell further...i brought more.
07-02-2008. BUY CPU (300 @ 7.65)
3 and a half months later.
23-05-2008. SELL CPU (475 @ 9.61)
left the profits in.

Can someone explain how this is a bad thing.

If CPU kept going down and:
a. never recovered
b. took many years to recover
c. went bankrupt

In any of those cases you'd have lost twice your original investment. And don't say it can't happen - just look at all the supposed 'blue chips' that have gone out of business over the years! If you kept buying more and more and more as it fell...... well you get the picture. You may never recover from a loss of that magnitude.

But we've all probably done it at some point. It can work sometimes, but sooner or later you'll get one that doesn't recover and get burnt really badly! We've all been there, done that, but hopefully learnt a very valuable lesson from the experience. I know I did!

 

[So_Cynical]

Just wanted to demonstrate how it can work in your favor, what u are buying
and when u are buying is of course critical.

I have a few shares that i haven't averaged down with...due to confidence
factors and a feeling that the time is not right.

I missed out on getting back into CPU on the recent down swing by 6 cents
(8.25) thought it would fall further...CPU back up to 9.54 today and im spewing.

I'm thinking ill average down into SUN this week - under $12.60 see how we go.

 

[DionM]

Roland,

Your post strikes a chord with me. I too have chased BBP down - though not to the same extent as you (only did it once) and I have not sold up.

What I have learnt is that I would only be comfortable with DCA if I was doing a staged entry into my final parcel size ... rather than using it to try and average down an already large position.

E.g. if I wanted 3000 units total, I would only use DCA and buy say 3x1000 lots if I thought the SP was fluctuating a lot (and I still wanted in).

Probably the wrong use is to buy 3000, see SP fall, buy another 1000, and so on ... trying to reduce the entry cost but at the same time, increasing losses if the price fell more.

If I used the staggered approach, I would have the benefit of the lower SPs or even putting the staggered buying on hold if things went crazy (or sell out).

I have used this method recently when buying CNP - I took a nibble at an amount I liked, then it dropped more, I took another nibble. Then I stopped, and set my stop loss ...

 

[AlterEgo]

I'm thinking ill average down into SUN this week - under $12.60 see how we go.

And what's your exit strategy if it all goes wrong? Do you have a stop loss?

What will you do if SUN drops to $12? Sell, or buy more?

And if it continues to slide to $11.50? Sell, or buy even more?

And if it slips even furthur to $11, sell or buy even more still?

$10?

$9??

$8???