Forum Archive Index - January 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

>
> 
>Mary was also promoting 'dollar cost averaging' in today's The 
>Herald. The sure fire way to buy stocks/units in her favourite 
>managed fund cheaply she says.
>
>Timing is a funny thing - just the other day I read in Barrons that 
>if anybody had bought into the Nasdaq on a 'dollar cost average' 
>basis from 1997 through 2001 they would have earned less than 1% 
>- a pittance of a gain through one of the biggest bull markets of 
>all time.
>
>And I have seen a graph somewhere else that shows if you bought into
>the S&P500 on the same basis you now need the S&P500 to increase by
>over 20% to break even.
>
>
>
I think dollar cost averaging can work, but it does rely on buying 
something of value rather than something that has just gone down in 
price.   Buying something at a 'ridiculously overvalued' price at the 
end of 1997 does not mean it is good value when sold as merely 
'highly overvalued' at the end of 2001.

This is why I believe fundamental analysis is absolutely essential in 
selecting shares, whether you be a trader or a long term investor.

I'm going to be doing some dollar cost averaging, I think, this year. 
 But I will be concentrating on 'averaging up' (buying shares at a 
price that is more than the average I have paid already) rather than 
averaging down.   It may seem a rather counter intuitive way of 
dollar cost averaging, but if a share price is strong (rather than 
overhyped) 'averaging up' is, in fact, a way of averaging down if you 
change your perspective from the present to the future.   

Surely as investors it is the future long term performance we should 
be most concerned about?  Doesn't it make sense to buy shares in a 
company that has experienced consistant year by year growth  rather 
than buy shares in a commodity type company bouncing of a cyclical 
low?   With the latter you will constantly have to worry about what 
the best time to jump off the cyclical train.  With the former you 
are liable to get far less worry and, into the future, a greater 
return.  

I know many financial advisers advocate dollar cost averaging.  But I 
can't help feeling that the real reason for this is that it gives 
the adviser a regular income!  That and the fact that it gives them 
something to talk to their clients about during the inevitable 
downturn that markets have, and it becomes obvious they haven't 
been minding their clients affairs too closely!  SNOOPY







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