Stock: Dollar Averaging

Market's down. Greed index is down and fear index is up. These are part and parcel of stock investment. If you have a proper risk management program in your investment strategy and have invested in companies that are built to last, there is little to worry. In the stock market, there is always a time to buy, a time to sell and a time to go fishing (meaning wait and see). Anyway, all of us do not have a crystal ball to see what will happen in the future. So, let's do what is within our control - invest prudently.


In stock investing, there is a strategy called dollar averaging. As nobody is able to time the market accurately, dollar averaging allows you to spread your investment over a period of time to reduce the risk of overpaying for a particular investment at any particular time. For example, if you want to purchase 50,000 shares of a stock, you may want to spread your purchases over 5 months, buying 10,000 shares per month. Let's say the stock price is $1 on month 1, $2 on month 1, $3 on month 3, $4 on month 4 and $5 on month 5. Your total cost of investment excluding trading cost will be $150k if you purchase 10,000 shares per month over 5 months. This will be $100k cheaper than to purchase all 50,000 shares at $5 each on month 5.


Is this really a good strategy? It depends. If you are a stock trader (i.e. not investor) and your holding period is a few days to a few months, then this strategy is suicidal in a falling market. It is especially so when both the company of that stock and your holding power are weak.


What would be a good time to use this strategy? It depends. Personally, I think this is a good strategy if you are investing in stock of a company that is well managed or stock index of a country that you believe to be financially stable. It could even be a ETF.


Try a simulation run of this dollar averaging strategy on STI ETF over a period of past few years and you will know whether this strategy works.








Disclaimer: The content in this blog contains purely my personal opinion and it is in no way a substitute for professional financial advice. You should seek advice from a professional financial advisor with any question regarding your financial matters.