|
Investment Strategies
Categories
- Value Investing
-
Growth Investing
|- Income Investing
-
Market Capitalization
-
Momentum Investing
-
Technical Investing
-
Buy and Hold Strategy
- Buy What You Know
-
Contrarian Investing
-
Turnaround Investing
-
Tobin’s Q
-
Responsible Investing
- ADR's
-
Global Investing
-
The Dow Theory
-
Odd-Lot Theory
-
Election Cycle Theory
-
Dow Dividend Theory
-
Penny Stocks
-
Initial Public Offerings
- Dollar Cost Averaging
-
Drips
- Risk Tolerance
|
|
Dollar Cost Averaging
Flexible dollar cost averaging (“DCA”) is investing a
fixed dollar amount at regular intervals. It’s a disciplined approach to
building up equity slowly. The “flexible” part of the term I added, because
of the uncertainty of the markets.
DCA is really a buy and hold strategy, using smaller
amounts of money and buying at regular intervals. The investor purchases
fewer shares when the market is high, but more shares when the market is
low. In a rising market, the average cost will be lower than the market
price.
In uncertain markets, however; if at the regular
interval you are uncomfortable with the price, don’t blindly buy. Keep your
money in cash and wait for the next interval and do the same thing. You
still have to worry about over paying or buying in a market that might be is
in a long-term cyclical decline. You need to retrain you mind; many
individual investors feel they can’t time the market. You have to try; this
is why technical analysis is so popular. If you feel that the market is
high, or your stock or mutual fund went up too much, don’t buy. It’s your
money; you must shop around for the lowest transaction cost that you can
find and you must buy low. If you make a mistake it’s ok, but you need to
try. A modified dollar cost averaging program (or DRIP) is what you should
consider. Every purchase you make should be monitored. If the security is
too high, pass and bank the funds until you are comfortable with the price.
It’s better to pass than to overpay.
I realize this is against what the books and experts
say on DCA, but one needs to adapt to the realities of today’s market
conditions.
There are
three decisions to make when investing in stocks or mutual funds: (1) which
company or fund to invest in, (2) what price to buy and (3) what price to
sell. If your initial stock selection and price are made correctly, it’s
likely that the end result will be profitable for you. I believe DCA and
DRIPs are very good ways to build a nice portfolio, especially when funds
are low. Your stock selection, timing and transaction cost, however, are
paramount.
|
|
