Dollar Cost Averaging (Stocks - Investing)

**rogercbryan** · 04-16-2009 10:08 AM

Here is an example:

You buy 400 Shares @ $7.02 (in 2005)
You buy 780 Shares @ $3.38 (in 2007)
You buy 1000 Shares @ $0.38 (in 2009)

The company drove down profitability with a merger. This brought the company to the brink of bankruptcy and actually drove the stock as low as $0.09. Since the company has found new financing the stock has slowly been moving upwards. With the above equation you now have a per stock price of $2.68.

Possible Next Move
You buy 2180 Shares @ $0.40 (today)

This would give you an average purchase price of $1.53. This is still well below the current price but more inline with a 2 year out look on the company. If you set a 2 year price of $3.00 per share then in essence you are buying in a 100% mark up on your average purchase price.

Would you make the move? Would you be more aggressive:
You buy 4280 Shares @ $0.40 giving you a $1.17 average price

Would you sell off and take your loss....

I said I would never buy stocks again until this week when one of my long term investments had a huge pop. DNDN which I bought for $4 in 2006 hit $17 today... So I sold off my profit and bought some C and the above stock... now I'm wondering if I should move to better position myself with the above stock... thoughts... comments....

Can you tell me what stock I'm talking about???

**rogercbryan** · 04-17-2009 02:16 PM

Here is a nice supplement to my post from yesterday. The stock I was talking about was SIRI (Sirius XM Radio). I bought 1200 shares at $0.38 ( a whopping $500's worth)... well its up 27% today. Throws off my calculations for future purchases... but still makes me smile...

So at $0.52 per share how many shares would I need to purchase to put my dollar cost average at 50% of current market value?

Come one... someone do some thinking on this damn site!

**BusinessAdviser** · 04-17-2009 03:03 PM

No offense, but I graduated already. If I wanted to do more homework problems, I'd have put off graduating.

**Gaulkin** · 04-17-2009 07:42 PM

Originally Posted by BusinessAdviser

No offense, but I graduated already. If I wanted to do more homework problems, I'd have put off graduating.

Your avatar picture makes you look stupid.

**elliotiscool** · 04-19-2009 01:21 AM

Originally Posted by Gaulkin

Your avatar picture makes you look stupid.

Grow up please. Thanks.

**BusinessAdviser** · 04-19-2009 01:33 AM

Originally Posted by elliotiscool

Grow up please. Thanks.

Seriously.

**JLeezer** · 04-19-2009 10:42 AM

While I agree with BusinessAdviser about the homework problem, let us continue with the invaluable lesson on dollar cost averaging.

The biggest problem I have identified so far is an inconsistent investment amount with each purchase. Typical DCA involves establishing a fixed dollar amount to invest each time a purchase is made. Assuming that this fixed amount is established with your first purchase, it is $2808.

On your second purchase, you did not adhere to the same investment amount ($2636.40).

On your third purchase, you also did not adhere to the same investment amount ($380.00).

On your fourth purchase, you again did not adhere to the same investment amount ($456.00).

On your last two purchases, you should have bought 7,389 shares (each time) to substantially reduce your cost per share average.

**BusinessAdviser** · 04-19-2009 12:27 PM

Originally Posted by JLeezer

While I agree with BusinessAdviser about the homework problem, let us continue with the invaluable lesson on dollar cost averaging.

The biggest problem I have identified so far is an inconsistent investment amount with each purchase. Typical DCA involves establishing a fixed dollar amount to invest each time a purchase is made. Assuming that this fixed amount is established with your first purchase, it is $2808.

On your second purchase, you did not adhere to the same investment amount ($2636.40).

On your third purchase, you also did not adhere to the same investment amount ($380.00).

On your fourth purchase, you again did not adhere to the same investment amount ($456.00).

On your last two purchases, you should have bought 7,389 shares (each time) to substantially reduce your cost per share average.

Correct. The whole idea of dollar cost averaging is to invest the same amount of money at regular intervals of time. The purpose for this is so that when shares are more expensive, you purchase fewer shares, and when they're less expensive, you purchase more shares. It helps prevent investing mistakes that occur out of emotion. Spending different amounts, as in the above example, defeats the purpose.

**JLeezer** · 04-21-2009 09:36 AM

Roger, have you considered writing a call on all those shares you own? The December 19th $1.00 call is trading for about $0.15 per share. Based on what you've shared so far, you could pull in about $450 for the options on what you own. Of course, you have to be ok selling everything at a buck a share, but I kind of doubt that Sirius is going to be trading over $1.00 per share by the end of the year.

Just a thought.

**financeblogger123** · 04-21-2009 10:57 AM

The dollar cost averaging that you are talking about here sounds more like something out of Boiler Room (looking for the quick buck) rather than a solid investment strategy to employ throughout life. It is true that you can use it in both scenarios, but one is deff. a lot more of a gamble than the other. Let me explain.

Dollar Cost Averaging becomes an investors best friend when you are dealing with something such as DRIP, when you have a set amount of money that you will be infusing into the market over a long period of time to purchase a specific stock. By purchasing shares, regardless of the stock pirce itself, with say 50 a week...over time you will be averaging out the cost of that stock and thus see a higher return for a growth portfolio.

Really is an amazing concept that can make you some money if implied properly.

**rogercbryan** · 04-21-2009 11:42 AM

All good info... As I was reading this I was realizing that you are correct that dollar cost averaging is not a 'chasing' method it is a steady investment method for long term sustainability. What is the correct name for investing over time in an attempt to cover losses in this manner?

Also, I've done a lot of option trading in the past. I've had some big hits and also some huge losses. I'm reexamining my methods currently as I contemplate investing new money in the market.

I always know what I'm doing... I often don't know how to explain it or what it is called... help??

**BusinessAdviser** · 04-21-2009 01:13 PM

Originally Posted by rogercbryan

All good info... As I was reading this I was realizing that you are correct that dollar cost averaging is not a 'chasing' method it is a steady investment method for long term sustainability. What is the correct name for investing over time in an attempt to cover losses in this manner?

Also, I've done a lot of option trading in the past. I've had some big hits and also some huge losses. I'm reexamining my methods currently as I contemplate investing new money in the market.

I always know what I'm doing... I often don't know how to explain it or what it is called... help??

With options, I prefer to stick with buying calls and selling puts. Why? Because the alternative, as it looks like you've found out, Roger, opens you up to unlimited risk. Also, it's important to understand exactly why you're choosing the option (or derivative) that you are.

**JLeezer** · 04-21-2009 02:10 PM

Originally Posted by BusinessAdviser

With options, I prefer to stick with buying calls and selling puts. Why? Because the alternative, as it looks like you've found out, Roger, opens you up to unlimited risk. Also, it's important to understand exactly why you're choosing the option (or derivative) that you are.

Could you elaborate on the unlimited risk involved in selling a call? I am still relatively new to options trading, but am not sure where this risk exists.

Thanks

Jon

**Squandered Halfpints** · 04-21-2009 02:41 PM

Originally Posted by rogercbryan

All good info... As I was reading this I was realizing that you are correct that dollar cost averaging is not a 'chasing' method it is a steady investment method for long term sustainability. What is the correct name for investing over time in an attempt to cover losses in this manner?

Also, I've done a lot of option trading in the past. I've had some big hits and also some huge losses. I'm reexamining my methods currently as I contemplate investing new money in the market.

I always know what I'm doing... I often don't know how to explain it or what it is called... help??

I'm not sure 'investing over time in an attempt to cover losses' could be considerdered a strategy. You said it yourself, your 'chasing'. I guess you can say your trying to 'time the market'.

**Squandered Halfpints** · 04-21-2009 02:47 PM

Originally Posted by JLeezer

Could you elaborate on the unlimited risk involved in selling a call? I am still relatively new to options trading, but am not sure where this risk exists.

Thanks

Jon

'selling a call' - or 'selling (an option to buy a security at a specific price in the future)'. Though option trading is very risky, It seems you know the amount of loss you potentially take before going into a transaction - so I'm not sure you can say that the risk is unlimited... Right? Enlighten me Business Adviser