For our fellow bloggers who don't know what dollar cost averaging is, please see what sister wiki has to say about it. (http://en.wikipedia.org/wiki/Dollar_cost_averaging)
Well if you ask me that question, I think dollar cost averaging does work in an economic depression or recession. I am writing this when Dow Jones Industrial Average (DJIA) is at 8,574.65 vs. its March lows of 6,469.95.
Now the reason I like dollar cost averaging is because I don't have a crystal ball to tell me when the market is going to bottom out or when the prices of any specific security are at its lowest. We may have some lucky chaps in the audience who may have caught the bottom for a couple of stocks but chances of that happening are really slim to none in every stock you invest in and moreover I think it's pure luck and not reproducible.
So my suggestion is to look for companies which have absolutely no chance of getting bankrupt. I have learned the hard way never to say "no" so I will rephrase it as... single out companies which have the least chance of insolvency and which have enough cash on hand. Look at book value /share and free cash/share ratios before starting dollar cost averaging.
Well if you ask me that question, I think dollar cost averaging does work in an economic depression or recession. I am writing this when Dow Jones Industrial Average (DJIA) is at 8,574.65 vs. its March lows of 6,469.95.
Now the reason I like dollar cost averaging is because I don't have a crystal ball to tell me when the market is going to bottom out or when the prices of any specific security are at its lowest. We may have some lucky chaps in the audience who may have caught the bottom for a couple of stocks but chances of that happening are really slim to none in every stock you invest in and moreover I think it's pure luck and not reproducible.
So my suggestion is to look for companies which have absolutely no chance of getting bankrupt. I have learned the hard way never to say "no" so I will rephrase it as... single out companies which have the least chance of insolvency and which have enough cash on hand. Look at book value /share and free cash/share ratios before starting dollar cost averaging.
Who should invest using DCA strategy?
DCA strategy becomes very beneficial for people who are time and/ or knowledge poor. This strategy can work wonders for busy professionals who don't necessary have the time required during normal market hours to trade. DCA is a great tool for people to are less knowledgeable about stock market strategies which can be very confusing.
What kind of money should I invest?
I would like to think that the money which you won't be needing for another say 2 years should be invested using DCA. The amount of money you invest during each time period may be insignificant but when pooled together for your specific investment timeframe should be significant enough amount.
Apart from money what is needed to invest using DCA?
Investor using DCA needs discipline. Discipline is I decide and do!
I believe the biggest deterrent to DCA not working as expected is lack of discipline from an investor. I do understand that it takes some heart to put money in a company's stock while the price is moving down...but fellows that is the exact reason why we are interested in DCA. So as the stock value falls, fixed amount of money which you put in at every interval is going to bring in more units/shares.
Which companies should you invested in using DCA?
Again...it only applies to companies which are not going bankrupt...hint hint...look for companies which government has promised to be too big to fail :) I didn't say that...Pres Obama did...so do you think he will keep his promise...I hope. There are also a ton of other companies which are diversified enough not to fail even if its few divisions are underperforming.
Other Advantages of DCA
Deciding to conduct a DCA on a certain stock pressurizes the investors to put that amount of money away every period. So this pressure over an extended duration creates delayed gratification.
Other strategies: I call it DCA++
Invest same amount of money each time the stock falls a predetermined amount or percentage. So as the value of the stock falls, you will be able to buy more units/ share of the same company. This combined with traditional dollar cost averaging helps to buy stocks close to the bottom and leads to a better average price. So you will essentially have two triggers to invest the 1st being the DCA time period and other is the price of stock falling a predetermined amount. Be sure to use both these triggers and not just one.
I hope you had fun reading this DCA blog. Similar to any other investment strategy, I am sure DCA and my self coined DCA++ will have many critics but let me tell you this one of the simplest secret of wealth building.
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