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Dollar Cost Averaging

Flexible dollar cost averaging (ďDCAĒ) is investing a fixed dollar amount at regular intervals. Itís a disciplined approach to building up equity slowly. The ďflexibleĒ part of the term I added, because of the uncertainty of the markets. 

DCA is really a buy and hold strategy, using smaller amounts of money and buying at regular intervals. The investor purchases fewer shares when the market is high, but more shares when the market is low. In a rising market, the average cost will be lower than the market price.  

In uncertain markets, however; if at the regular interval you are uncomfortable with the price, donít blindly buy. Keep your money in cash and wait for the next interval and do the same thing. You still have to worry about over paying or buying in a market that might be is in a long-term cyclical decline. You need to retrain you mind; many individual investors feel they canít time the market. You have to try; this is why technical analysis is so popular. If you feel that the market is high, or your stock or mutual fund went up too much, donít buy. Itís your money; you must shop around for the lowest transaction cost that you can find and you must buy low. If you make a mistake itís ok, but you need to try. A modified dollar cost averaging program (or DRIP) is what you should consider. Every purchase you make should be monitored. If the security is too high, pass and bank the funds until you are comfortable with the price. Itís better to pass than to overpay.

I realize this is against what the books and experts say on DCA, but one needs to adapt to the realities of todayís market conditions. 

There are three decisions to make when investing in stocks or mutual funds: (1) which company or fund to invest in, (2) what price to buy and (3) what price to sell. If your initial stock selection and price are made correctly, itís likely that the end result will be profitable for you. I believe DCA and DRIPs are very good ways to build a nice portfolio, especially when funds are low. Your stock selection, timing and transaction cost, however, are paramount.

 

 

 

 

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