Dollar Averaging - Good or Bad?

[gav]

Just finished reading all 4 pages here. Definitely raised some points I hadnt thought of... but I still think dollar cost averaging would work over the very long term, especially if you started now. For a young person without a lot of capital, you could put say $4K into xyz every 2nd month (and try and pick the lows) and build yourself a good postion, then move onto another stock (or do multiple stocks concurrently). This way you would not miss out on any large jumps in share prices that may happen if instead you wait it out and save up $20K before buying in.

 

[johenmo]

Just finished reading all 4 pages here. Definitely raised some points I hadnt thought of... but I still think dollar cost averaging would work over the very long term, especially if you started now. For a young person without a lot of capital, you could put say $4K into xyz every 2nd month (and try and pick the lows) and build yourself a good postion, then move onto another stock (or do multiple stocks concurrently). This way you would not miss out on any large jumps in share prices that may happen if instead you wait it out and save up $20K before buying in.

Gav raises an interesting idea for someone with little money. But it is fraught with danger. Why? Because if you have few $ & choose the wrong company then you could lose it as it plumments away, if yr dollar avging down.

Maybe a limited approach in a bull market is "safer"? So I'd say "in certain defined circumstances, it can work. But not as a blanket rule". Though most people's super works on this basis, does it not?

We did it once and that was with a fund where the currency went against us (we were in NZ at the time and the NZ $ strengthened). Allowing for time we broke even.

 

[skyQuake]

The problem with Dollar cost averaging is that once in a blue moon, you will lose. And lose big. In fact, you are guaranteed to lose mathematically in the long run. Those who averaged into Bear Sterns, AIG, Lehmans, CNP, ABS all have taken the full force of leverage that goes against you. Sure the odds are you'll break even more often than not, but a catastrophic loss could be just around the corner.

Nothing is too big to fail (as we have recently seen) and unexpected things can happen that will wipe out your account if you have averaged down... If you're leveraged, then the process will only be accelerated...
Look up martingale and anti-martingale systems.

Caveat: Averaging down in some commodities (unleveraged) poses less risks. For example if you buy a barrel of oil (consumable, non-renewable) I'm pretty sure you're gonna be able to sell it for a lot more than you bought it for somewhere down the track. If not you can always use it for your car.

 

[jeflin]

A big mistake for investors is that they cash out of one position with small losses but unfortunately get into another position and continue to sustain losses there. They are worse off by the broker fees.

If the stock is right, I will rather buy on the dips and continue to average down. It is hard to time the market and consistently alternate between cash and stocks at the right time, else all of us will be millionaires.

 

[Pairs Trader]

I think dollar cost averaging is great in both short and long term trading. Of course you have to have a uncle point where you cut it loose, but you will never pick the exact top or bottom, so why not average? that way you will definately not get the worst price. I scale in and out of all my trades, its less stressful and gives you more flexibilty.

 

[andrew08]

Gav raises an interesting idea for someone with little money. But it is fraught with danger. Why? Because if you have few $ & choose the wrong company then you could lose it as it plumments away, if yr dollar avging down.

Maybe a limited approach in a bull market is "safer"? So I'd say "in certain defined circumstances, it can work. But not as a blanket rule". Though most people's super works on this basis, does it not?

We did it once and that was with a fund where the currency went against us (we were in NZ at the time and the NZ $ strengthened). Allowing for time we broke even.

If like myself you have limited capital then why not average into a LIC or ETF rather than a couple of specific companies?

I hold ARG and plan on adding to it in the DRP & SPP and at other times if the price is right. Returns may not be as great but its far less volatile, pays good dividends and beaten XAO by 2.5% over last 20 years. Not sure how much its beaten XAO by in this market. My plan is to invest majority of my capital in ARG or other LIC and average in.

Then buy the odd spec or other stock if a see a chance to trade.

 

[skyQuake]

I hold ARG and plan on adding to it in the DRP & SPP and at other times if the price is right. Returns may not be as great but its far less volatile, pays good dividends and beaten XAO by 2.5% over last 20 years.

2.5% in total or per year?

http://finance.yahoo.com/q/bc?s=ARG.AX&t=my&l=on&z=m&q=l&c=^aord

Doesnt look like its outperforming really...

 

[tech/a]

Dollar cost averaging = Very deep pockets.

 

[andrew08]

2.5% in total or per year?

http://finance.yahoo.com/q/bc?s=ARG.AX&t=my&l=on&z=m&q=l&c=^aord

Doesnt look like its outperforming really...

ARG down 25% XAO down 40% for last 12 months.
ARG up 80% XAO up 60% for last 10 years

This wasn't meant to be about the merit of this stock. Was just trying to point out that if you didn't have a lot of capital this is a less risky investment if thats what your looking for.

 

[rederob]

Dollar cost averaging = Very deep pockets.

I guess it depends on what you define as dollar cost averaging.
In the present market I intend to invest around $5k per month in selected equities, in no particular order, with a view to a 3-5 year hold.
I expect these investments may do very little for some considerable time, and it's a risk I am prepared to take.
I suspect a global recession is as bad as it will get as I think world economies can stave off a depression with a bit of cooperation between them.
If I am about right, then investments made through 2009 are likely to turn the corner in 2010 or 2011.

So in the context of this thread, my version of dollar cost averaging is not on any particular stock, but into a depressed market that offers some low-priced equities that have a good probability of returning to profitability some years ahead.

 

[roland]

I guess it depends on what you define as dollar cost averaging.
In the present market I intend to invest around $5k per month in selected equities, in no particular order, with a view to a 3-5 year hold.
I expect these investments may do very little for some considerable time, and it's a risk I am prepared to take.
I suspect a global recession is as bad as it will get as I think world economies can stave off a depression with a bit of cooperation between them.
If I am about right, then investments made through 2009 are likely to turn the corner in 2010 or 2011.

So in the context of this thread, my version of dollar cost averaging is not on any particular stock, but into a depressed market that offers some low-priced equities that have a good probability of returning to profitability some years ahead.

Others have argued, that it would be wiser to cost average after the market has turned and average into rising stocks rather than falling stocks so that each investment actually increases in value rather than accelerating your losses.

Having said that, I am guilty of cost avaeraging now with a similar outlook to yours. Some stocks are working out, some are not. Working with higher dividend payers does take some of the sting out of the trauma of a continually falling market .... but only just.

 

[Reealjrd]

Hello Friends,

Averaging is ok but some times not always. Yes if you are investing in this market than trade with an average.

 

[rederob]

Others have argued, that it would be wiser to cost average after the market has turned and average into rising stocks rather than falling stocks so that each investment actually increases in value rather than accelerating your losses.

It assumes a number of things.
First, that the stock chosen does proportionately better after the market has turned.
Secondly, that the stock chosen in the present downturn has (a lot) further to fall.
I think there are equities that have a low downside risk in the present market that deserve a strong consideration for long term investors. I would put PDN in that category: Minimal debt, strong cash reserves, excellent uranium reserves, and a uranium market that has very little downside and a strong (known) upside.
I would avoid any equity that has a debt position that could not be covered by present cash flows, or refinancing arrangements that might not be covered in this tight market.
As the world will remain a strong consumer of energy, regardless of the economic climate, I will target energy-based equities ahead of all others over the next 6 months.
Having said that, I snuck into MRE and will have a substantial holding as a result of their recent 30cps offering. If other "bargains" come along I will consider more speculative buys on a case by case basis.

 

[tech/a]

So in the context of this thread, my version of dollar cost averaging is not on any particular stock, but into a depressed market that offers some low-priced equities that have a good probability of returning to profitability some years ahead.

Frankly I just cant be sure of that.
The economic landscape is changing so rapidly that good value today may well be very poor value in 12 mths time.
All I know is that I can control my trading on a daily timeframe nothing more.
Longterm for me is 6 hrs of the trading day.
I was a very long term compounding trader for many years.
World economics has dictated that I alter my view.

Consistent trading profit that I can bank is my own personal methodology at this time.
Id rather dolar cost average UP in a screaming bull market than DOWN in a bear market which is and will change the face of percieved value---sooner than later.

Each to their own Rederob.

 

[MichaelD]

28-02-2008 SUN (160 @ 14.45)
01-07-2008 SUN (165 @ 12.45)

7-11-2008 SUN 8.85

Speaks for itself.

What's even more extraordinary here is that people are STILL talking about dollar cost averaging as if it's a good idea. Hasn't the last 12 months taught you anything? (I guess not).

 

[johenmo]

Id rather dolar cost average UP in a screaming bull market than DOWN in a bear market which is and will change the face of percieved value---sooner than later.

This sums it up for me - though the earlier comment about commodities may be relevant. Not knowledgable enough re commodities. Buying down reminds of the adage "throwing good money after bad". But as usual, there's no single/fixed rule or method.

 

[rederob]

Each to their own Rederob.

Agreed.
But that doesn't enlighten the thread!
Some equities may already have undershot to the downside and have been missed.
Examples: KZL at 50 cents, MGX at 32 cents and MRE at 19cents.
Some have minimal probable downside beyond recent cycle lows.
Examples: APA, PDN, PLA, OSH and LHG.
Others are trending to multi-year lows, have excellent long term prospects, and have a strong probability of recapturing their former highs on the turnaround.
Examples: Too many, but my favourite is SGM as it will bounce with the nickel price so can easily be tapped.

On the issue of waiting for the bull to return, and then re-enter strongly: I agree. I have set 20% of my cash to be reinvested to end-2009 and the remainder riding on the return of the bull.

I don't discount the probability of lower prices ahead for most equities.
Alternatively, I don't discount the probability that for some equities the low has already been locked down.
Furthermore, if I were giving advice right now it would be along the lines of stay out of the markets unless you have deep pockets, fast fingers or insider knowledge to die for.

 

[The Edge]

Saturday 8 November 2008

Bad, Bad, Bad!

It is not clear to me from where this "strategy"
derives, but I am guessing from the mutual fund
industry, during the 1960s forward, when there
was an unabated bull market, and fund brokers
"promoted" the notion of buying on a regular
basis, even during declines, because the market
keeps going up, and over a period of time....etc.

Naturally, this increased a broker's commisssion,
hs main objective. That people may have made
money was incidental and certainly subordinate.

In reality, it is an abdication of one's financial
responsibilty, especially when one's funds are
limited, the responsibility of being in charge of
one's own fate, financial or otherwise.

Someone mentioned that it works only when the
trend is to the upside, a basic truism, and under
those conditions, this elementary approach will
work, but only under those specific conditions.

If one cannot determine what a trend is, then
caveat emptor. The question to ask is, "How has
it been working?" Especially lately.

Most everyone who has been dutifully following
this procedure for the past decade is under water.
Anyone doing it for the past few years has likely
"drowned."

There is absolutely nothing "safe" about such a
"mechanical" approach to investing, and to think
that over a period of "3-5 years" to expect to
come out ahead, even using today as a starting
point, is folly.

There is nothing that says stocks have reached
any bottom to the downside. To believe that a
bull market, decades long, will correct in less than
a year admits of better odds at a casino.

Instead of investing in an application of a decling
method, fraught with potential risk, why not invest
in some time and a few books that explain what is
a trend, and how to take advantage of it. Without
promoting anything for gain, an excellent primer
can be found in William O'Neil's book, How To Make
Money In Stocks.

Anyone who opts for the soundness of fundamentals
as a clarion call solution also ignores the reality of
what can happen in the markets, irrespective of how
"sound" the "fundamentals" are. Many fundamentalists
have recently learned how subjective is their thinking...
a different argument, to be sure, but even that approach
can be myopic.

Right now, it could well be years, many years, before
another bull market in stocks begins to develop, let
alone blossom.

Just a few thoughts.

 

[tech/a]

Agreed.
But that doesn't enlighten the thread!
Some equities may already have undershot to the downside and have been missed.
Examples: KZL at 50 cents, MGX at 32 cents and MRE at 19cents.
Some have minimal probable downside beyond recent cycle lows.
Examples: APA, PDN, PLA, OSH and LHG.
Others are trending to multi-year lows, have excellent long term prospects, and have a strong probability of recapturing their former highs on the turnaround.
Examples: Too many, but my favourite is SGM as it will bounce with the nickel price so can easily be tapped.

On the issue of waiting for the bull to return, and then re-enter strongly: I agree. I have set 20% of my cash to be reinvested to end-2009 and the remainder riding on the return of the bull.

I don't discount the probability of lower prices ahead for most equities.
Alternatively, I don't discount the probability that for some equities the low has already been locked down.
Furthermore, if I were giving advice right now it would be along the lines of stay out of the markets unless you have deep pockets, fast fingers or insider knowledge to die for.

There is a vast difference to a bottom and averaging down.
You mention KZL a stock I have traded several times since 52c on a very short term and at times intraday basis.

But here is some Averaging down theory for discussion.

 

[rederob]

Tech
I was never talking about "averaging down".
I am talking about some judicious dollar cost averaging into equities that may have already bottomed, or have little further downside risk.
For example, I presently have a buy on APA conditional on it hitting $2.55 again. You have to go back 5 years to achieve that price and back then the dividend return was not strong.

With regard to KZL and many other commodity stocks, don't expect a turnaround any time soon. However, KZL is now trading at a price last seen when it was still a few years out from becoming a producer, and had a relatively small resource portfolio backing it up. The company is many times more "valuable" now than it was 6 years ago and there is a good probability that value will be unlocked when the market turns.