Dollar Cost Averaging

Dollar cost averaging is one of the most popular ideas in the investment community. Everyone seems to like it and it has become a watchword among stock and mutual fund brokers. If it is properly done you will make money, if not you will lose money or at best stay even. Let's examine the basic premise behind this method of investing.

You decide to buy shares in Mouse Trap, Ltd.(symbol CHZ), a computer company that produces sophisticated hardware. The shares are now selling for $40 and you want to purchase approximately $1,000 worth each month. Today you buy 25 shares. Next month the stock has gone up to $43 so your purchase is 23 shares (I'm rounding these off because you can't buy fractions of shares.) The following month it drops back to $40, you get 25 more. Then at $37, you have 27 shares. At $35, 28 shares. At $32, 31 shares. You have invested $6,000 and have 159 shares at an average cost of $37.75.

With the current price of the Mouse Trap at $32 you have a loss of almost $1,000 (159 X $32 = $5,088). The object of buying any stock or mutual fund is to have more money than you put in, not more shares and less money. Who came up with this anyway?

Many years ago a broker talked his client into buying a thousand shares of Gravy Train (symbol EZSt) at $50 per share. In 30 days Gravy Train had spilled down to $30 and the broker didn't want to tell his customer the bad news, but he had to call him so he came up with this: "Great news, Mr. Mushroom, Gravy Train is now at $30. If you buy another $50,000 worth you can get 1,666 shares and own all 2,666 shares at an average price of only $37.50. Isn't that wonderful!" So far a "wonderful" loss of $20,000. There is a basic rule I learned a long time ago as a floor trader: NEVER ADD TO A LOSING POSITION.

I am in favor of dollar cost averaging, but there is a right way to do it. Only buy more shares as the price advances. Each purchase should be at a higher price per share than the previous price per share. This applies to both stocks and mutual funds. One good stock can make you a very rich person; one bad one can put you in the poorhouse.

In 1996 one of the hot stocks was Boston Chicken selling in a range of $30 to $40 per share. You could really own a lot of these shares had you continued to pour in money. It currently is selling at 50 cents per share. And mutual funds are not exempt. Lexington Troika-Dialog Fund was $24 in 1997. Today it is $3.00 per share. If you had dollar cost averaged UP your only loss would have been your first purchase.

Remember the object of investing is to make money not own a lot of shares.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

---

The Cub; II

We keep hearing about this bear market and that the... Read More

China Syndrome

There has been great condemnation recently because China has been... Read More

Do You Know What is the Single MOST Critical Mistake in Trading the Stock Market??

Well maybe that's overstating it a little, but it's certainly... Read More

Making Outsized Returns in the Stock Market - Using the Dow Theory

The Dow TheoryCharles H. Dow... Read More

The Great Stock Market Secret

When the stock market is going up and all your... Read More

The Elephant

Four blind men were asked to give a description of... Read More

Prosperity

It has fallen upon the consumer to make our economy... Read More

Price to Earnings Ratio - P/E

After finding the price of a particular stock, usually the... Read More

More Window Dressing

Two weeks ago I wrote about what the Securities and... Read More

A Stock Market Investment Plan that Never Lets You Down

The bulls and bears of the stock market are both... Read More

Shadow Bull

As one of my regular readers you know I have... Read More

Political Investing

We have two candidates for president that have really different... Read More

How to Read an Annual Report

Every publicly traded company is required by the SEC(Securities and... Read More

Will the Stock Market be Lower in October?

The stock market often closes a week in the middle... Read More

Managing Investing and Stock Market Risks

Reduce your investing and stock market risks by:Setting your sights... Read More

Forces that Move Stock Prices

Among the largest forces that affect stock prices are inflation,... Read More

Buying New Issues

Has your broker been calling you recently with the "great... Read More

How to Find Value in No Load Mutual Fund Investing

What are you thinking when it comes to your no... Read More

Stuff

I continually hear from economists, talking heads, other market letter... Read More

Duck

Duck! No I don't mean a quack, quack. I meant... Read More

The Value of Stocks of a Company

The debate rages all over Eastern and Central Europe, in... Read More

Stocks: Understand What You Buy!

"There is nothing more frightful than ignorance in action!" Johann... Read More

Fools Gold

The stock market has been in an up trend for... Read More

Hold Em and Fold Em

When most analysts, financial planners, fund specialists and investors try... Read More

Overvalued & Underbought

With all the bad news that has been dumped upon... Read More

Rebalance And Diversify

The stock market has not been very kind to your... Read More

Different Types of Mutual Funds

This is a guide to the different types of mutual... Read More

Dividend Paying Stocks

I would like to share with the reader an article... Read More

Historical Briefing: Stocks, Finance and Money

The World Bank claims that some two billion of the... Read More

How Commodity Trading Differs from Stock Trading

There are major differences between trading stocks and trading futures.... Read More

Two for the Money

Look back over the years and try to remember how... Read More

Why Investors Use Financial Planners

Do you have a financial planner? Does one of your... Read More

Frog In The Pot

You remember the story about the frog that was put... Read More