Dollar-cost averaging (DCA) according to Investopedia is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase.
Simply put, assume you plan to own $15,000 worth of Apple shares, you simply divide into 3 batches and buy say $5,000 at one time, often if the share price is downtrend.
There are debates as to whether this is a good strategy especially when the stock market typically trends upwards in the long term, and is particularly true for good growth stocks.
This strategy works particularly well at times of high volatility like now, and there are still many uncertainties and the market is fairly over-valued and for those attuned with technical analysis, when prices are at resistance levels.
There is really no way to time the market, so the wise thing is to understand a stock well, knowing its competitive advantages and its growth potential, and start buying it when it is undervalued and priced with some margin of safety.
Let me do an illustration of my actual purchases recently with regards to American Express AXP.
My average purchase price was brought down to $105.19 and as of now the share price has recovered to $107 and I am in slight profits.
Dollar cost averaging may not be easy to execute emotionally especially when there is a sharp 20% to 30% drop in share price. You need conviction in your assessment of the stock. Mr Market is seldom rational in the short term, and it is probably the best time to pick up additional shares at great discounts. Of course, if you assess that you have made a mistake with a particular stock, then you don’t proceed with dollar cost averaging and may opt to exit the position.
Presently, the market has rebounded strongly and many stocks are over-valued again.
Do you know how to analyze a company step by step, evaluating its financial fundamentals and then determining a fair value to pay? Join our Webinar on 12 June Friday 7.30 pm where we will discuss if it is a good time to buy the FAANG stocks, register here.
At Journey With Money, we are practitioners of Value Investing for Singapore and US stocks. We are passionate about sharing our Stock Investment knowledge and experience but the materials we present do not constitute stock recommendations and readers are urged to do their own due diligence for any investment decisions.
Do leave us comments and feedback below so we can improve on our contents.
Please also follow us on our Facebook Page.