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
No, this is not a symbol for some Latin number.... Read More
One of the most believed bits of conventional wisdom from... Read More
To become a successful trader you must have some kind... Read More
If you go to Haiti or other places in the... Read More
If you don't know where you are going any road... Read More
The stock market has not been very kind to your... Read More
When it comes to buying a stock or mutual fund... Read More
There is a famous cliff on the ocean in Acapulco... Read More
Inverted interest rates? What's that? Who cares? Even if you... Read More
Since I can remember, and that's a long time ago,... Read More
This is the continuing story of our two imaginary traders,... Read More
I know there are a lot of you out there... Read More
We are already in it, but you can't see it.... Read More
It looks like the market is ready to start up... Read More
The recent criminal fiasco in the mutual fund industry is... Read More
Wouldn't it be nice if you were only in the... Read More
With all the bad news that has been dumped upon... Read More
Ever notice how behavior in one area of life can... Read More
In my opinion, due to the volatility of stock market... Read More
Every broker and financial planner will tell you that you... Read More
You probably know the story of Sherlock Holmes and the... Read More
When you become interested in a stock or mutual fund... Read More
Why? Because I am going to shatter your conventional wisdom... Read More
Just 30 years ago the stock market was a shadow... Read More
04/28/2005NASDAQ dropped -12.5% year to date in 2005. S&P500 index... Read More
Someday you may want to retire and continue to live... Read More
With an insecure job market, overworked employees, insufficient retirement savings... Read More
What a great statement!I just heard someone use it in... Read More
If you have not back tested your trading system, you... Read More
You read and hear a lot about hedge funds. Unfortunately,... Read More
Sidney felt sick as she looked at her latest OptionsXpress... Read More
During the day I watch CNBC-TV, the stock market channel.... Read More
What! Me worry?Many of you remember the cover of MAD... Read More
Before they go over the cliff to their destruction these... Read More
The basis of diminishing return discussions surround such simple notions;... Read More
Every publicly traded company is required by the SEC(Securities and... Read More
You probably have been told that options are risky. Even... Read More
Checked your 401K lately? Going back to about a year... Read More
Jack and Jill went up the hill to fetch a... Read More
Ever turn down a street, get half way and suddenly... Read More
Everything you invest in has risk so you want to... Read More
Mutual funds were created with the idea that one person... Read More
Have you bought any mutual funds this year or late... Read More
Outlined below are some of the advantages and disadvantages of... Read More
Just about everything you have been told about Social Security... Read More
Every day I hear from the "experts" on CNBC-TV and... Read More
Reduce your investing and stock market risks by:Setting your sights... Read More
Everyone who invests in the stock market wants to be... Read More
'Sector funds are too risky.' 'I doubled my money with... Read More
Both the stock market and oil prices rallied recently, which... Read More
Most people think the stock market is a zero sum... Read More
On Monday, November 25, 2000 Investor's Business Daily listed on... Read More
The stock market has not been very kind to your... Read More
One of the main reasons many of us get into... Read More
TOO OFTEN, INVESTORS SIMPLY CHOOSE TO follow the crowd. This... Read More
If you are a baby boomer, time is not on... Read More
Maximizing a stock market investmentThere are several factors an investor... Read More
To begin, you might look at playing the stock market... Read More
The stock market has been going up for more than... Read More
From the book 'The Stockopoly Plan' by the author Charles... Read More
Every day on CNBC-TV they show a 200-day moving average... Read More
AS BUILDERS BEGIN WORK ON THE FREEDOM TOWER in New... Read More
Robert Rodriguez likes to buy stocks at their lows. When... Read More
When it comes to stock market trading it PAYS to... Read More
With the internet such a huge part of our daily... Read More
With all the bad news that has been dumped upon... Read More
Stocks & Mutual Fund |