Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20
U.S. Long Bond: Let's Review the "Upward Point of Exhaustion" - 27th Jun 20
Gold, Copper and Silver are Must-own Metals - 27th Jun 20
Why People Have Always Held Gold - 27th Jun 20
Crude Oil Price Meets Key Resistance - 27th Jun 20
INTEL x86 Chip Giant Stock Targets Artificial Intelligence and Quantum Computing for 2020's Growth - 25th Jun 20
Gold’s Long-term Turning Point is Here - 25th Jun 20
Hainan’s ASEAN Future and Dark Clouds Over Hong Kong - 25th Jun 20
Silver Price Trend Analysis - 24th Jun 20
A Stealth Stocks Double Dip or Bear Market Has Started - 24th Jun 20
Trillion-dollar US infrastructure plan will draw in plenty of metal - 24th Jun 20
WARNING: The U.S. Banking System ISN’T as Strong as Advertised - 24th Jun 20
All That Glitters When the World Jitters is Probably Gold - 24th Jun 20
Making Sense of Crude Oil Price Narrow Trading Range - 23rd Jun 20
Elon Musk Mocks Nikola Motors as “Dumb.” Is He Right? - 23rd Jun 20
MICROSOFT Transforming from PC Software to Cloud Services AI, Deep Learning Giant - 23rd Jun 20
Stock Market Decline Resumes - 22nd Jun 20
Excellent Silver Seasonal Buying Opportunity Lies Directly Ahead - 22nd Jun 20
Where is the US Dollar trend headed ? - 22nd Jun 20
Most Shoppers have Stopped Following Supermarket Arrows, is Coughing the New Racism? - 22nd Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Stock Market Investors Beware of Deadly Dollar Cost Averaging

InvestorEducation / Learning to Invest Apr 05, 2013 - 05:31 PM GMT

By: DailyGainsLetter

InvestorEducation

Moe Zulfiqar writes: If the price of a stock or any other financial instrument is headed downward, should you buy more or sell? Investors are faced with this question every single day when they see their holdings decline in value. In situations like these, investors sometimes make a mistake of buying more of something when they should have been selling it—this is often referred to as dollar cost averaging.


At the very core, dollar cost averaging is simply buying a security constantly regardless of the price. The idea behind this method is very simple: investors don’t really have to worry about market timing or getting into a stock at the right price. This strategy can be used as a way to accumulate a security over time.

If an investor buys a stock while it’s going down, their thinking is that the average cost will decrease, and they will be able to profit more once the price rebounds a little—the price doesn’t have to return to the same point it was at before.

Look at it this way; you buy shares of ABC Inc. at $10.00 each. A few weeks later, you find that the price has gone down to $8.00—a 20% decline in value. You go ahead and buy even more shares. Now, if you take the average of the two prices you paid for ABC shares, you will find that your cost is actually $9.00—your cost has gone down by buying the stock at a lower price.

With this comes one question: does buying more when something is falling in price really add any value to your portfolio or reduce the risk? The cold hard truth is no.

While most investors may not realize this, so-called “dollar cost averaging” actually increases an investor’s exposure to risk.

Think about the example above with ABC Inc.; if an investor continues to buy more shares of ABC when its price is falling, they are simply increasing the risk in their portfolio. Remember, you must try to diversify your portfolio in order to make it immune to market fluctuations. In this example of dollar cost averaging, the investor doesn’t diversify; instead, they add more to one stock. Before buying, ask yourself this one question: while the prices are going lower, what happens if the price keeps going lower?

In addition to increasing risk in the portfolio, dollar cost averaging also increases transaction costs. Let’s return to our example above. An investor buys ABC Inc. shares at $10.00, and then bought at $8.00 again; this investor’s broker charges $10.00 per trade. This investor’s total transaction cost for ABC shares will be $20.00; on top of this, they still have a loss of $1.00 per share.

What dollar cost averaging essentially does is kill an investor’s profitability and increase their losses—even if they don’t buy more shares as the price goes lower.

Instead of making a mistake of buying more when the price of a stock is falling, investors must think long term and know that there will be fluctuations in the market. They should focus on asset allocation to keep their portfolio in line with their long-term targets. Constantly buying when a stock’s price is in a freefall is like trying to catch a falling knife—the end results will be a loss to the investor’s portfolio, delaying them from reaching their long-term goal.

Source:http://www.dailygainsletter.com/wealth-management/investors-beware-dollar-cost-averaging-deadly/572/

Copyright © 2013 Daily Gains Letter – All Rights Reserved

Bio: The Daily Gains Letter provides independent and unbiased research. Our goal at the Daily Gains Letter is to provide our readership with personal wealth guidance, money management and investment strategies to help our readers make more money from their investments.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules