E-Mail 'The Pitfalls of Dollar Cost Averaging' To A Friend

by Investing School on January 28, 2009

Email a copy of 'The Pitfalls of Dollar Cost Averaging' to a friend

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Manshu January 28, 2009 at 10:40 am

Thanks for allowing my post here!

Silicon Prairie January 31, 2009 at 12:06 pm

Dollar cost averaging also often refers to buying a constant dollar amount of stocks or bonds at regular intervals – over a period of time you get the average price even if you buy on some of the high or low days. What you describe is more of a one-time thing.

It’s not necessarily that bad to buy a stock that has gone down. If someone is willing to sell it to you for less than its worth you should take it before they realize this, and if you’re willing to buy another stock for more than it’s worth that doesn’t automatically mean it will go up.

In fact, the reverse is usually true. Although a share in a company is only worth what someone will pay for it, the actual value can’t possibly change as much as the price does. This means that sometimes the price is too high and sometimes it’s too low – if it’s risen rapidly there’s a very good chance that it’s too high (or just high enough that you’re already paying full price for the better earnings so it’s not an advantage).

Stephen Swanson February 3, 2009 at 2:49 pm

Agree with your premise, particularly in a bear market! While the Warren Buffet’s of the investing world can afford to average down to own large stakes in good companies, the average investor gets killed as they quickly run out of funds to average down further, not to mention picking the wrong stocks to begin with!

The only time it might make sense is during a bull market, in a good stock, after short term pullbacks to technical support (usually the 20 or 30 day moving average). In that case, you’ll be averaging up NOT down. Those pullbacks are good entries that institutional traders use to add to their positions. Let them drive the price and you can just go along for the ride.

Manshu February 7, 2009 at 2:15 pm

@Silicon Prairie – I love the idea of someone buying 100 dollars worth of stock every month regardless of the stock market ups and downs. This is a good way to move away from market timing that can prove dangerous.

@Stephen – I’ve done upwards averaging myself. Most of the time I have not regretted it, but of course like everything else – I’ve made mistakes in this too.

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