{"id":196,"date":"2008-10-09T12:58:01","date_gmt":"2008-10-09T17:58:01","guid":{"rendered":"http:\/\/poojanblog.com\/?p=196"},"modified":"2008-10-10T11:28:03","modified_gmt":"2008-10-10T16:28:03","slug":"the-beauty-of-dollar-cost-averaging-a-bear-market-strategy","status":"publish","type":"post","link":"https:\/\/poojanblog.com\/blog\/2008\/10\/the-beauty-of-dollar-cost-averaging-a-bear-market-strategy\/","title":{"rendered":"The beauty of dollar-cost averaging | a bear market strategy"},"content":{"rendered":"

MAJOR DISCLAIMER: I am not a financial analyst\/expert, and I know nothing about stocks, markets, and money. If I did, I would have probably figured out how to monetize this blog. If you want real financial advice, seek a financial adviser.<\/span><\/p>\n

Dollar-cost averaging<\/a> is a phenomenon that occurs when you regularly invest the same amount of money in a stock no matter what happens<\/strong>. What tends to happen when you adopt this head-in-the-sand attitude is that when stocks are high, you end up buying fewer shares; when stocks are low, you end up buying more shares.<\/p>\n

Note that the old adage of “buy low, sell high” is still the best you can do. However, (as Burton Malkiel<\/a>\"\" points out), timing the market on these highs and lows is extremely difficult.<\/p>\n

Here’s an example. Let’s say for 12 months, I invest in a stock. The first 6 months, the stock goes up, then returns to its initial price. The next six months, the stock goes down then returns to its initial price. Let’s say I invest $1 per month in the stock no matter what the price is doing<\/em>. Here’s a table with the numbers:<\/p>\n\n\n<\/col>\n<\/col>\n<\/col>\n<\/col>\n<\/col>\n<\/col>\n<\/col>\n<\/colgroup>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
month<\/td>\nprice<\/td>\nshares purchased<\/td>\ncumulative shares purchased<\/td>\naverage price<\/td>\ntotal value<\/td>\ngain\/loss<\/td>\n<\/tr>\n
1<\/td>\n1<\/td>\n1<\/td>\n1<\/td>\n1<\/td>\n1<\/td>\n0<\/td>\n<\/tr>\n
2<\/td>\n1.1<\/td>\n0.91<\/td>\n1.91<\/td>\n1.05<\/td>\n2.1<\/td>\n0.1<\/td>\n<\/tr>\n
3<\/td>\n1.2<\/td>\n0.83<\/td>\n2.74<\/td>\n1.09<\/td>\n3.29<\/td>\n0.29<\/td>\n<\/tr>\n
4<\/td>\n1.3<\/td>\n0.77<\/td>\n3.51<\/td>\n1.14<\/td>\n4.57<\/td>\n0.57<\/td>\n<\/tr>\n
5<\/td>\n1.2<\/td>\n0.83<\/td>\n4.34<\/td>\n1.15<\/td>\n5.21<\/td>\n0.21<\/td>\n<\/tr>\n
6<\/td>\n1.1<\/td>\n0.91<\/td>\n5.25<\/td>\n1.14<\/td>\n5.78<\/td>\n-0.22<\/td>\n<\/tr>\n
7<\/td>\n1<\/td>\n1<\/td>\n6.25<\/td>\n1.12<\/td>\n6.25<\/td>\n-0.75<\/td>\n<\/tr>\n
8<\/td>\n0.9<\/td>\n1.11<\/td>\n7.37<\/td>\n1.09<\/td>\n6.63<\/td>\n-1.37<\/td>\n<\/tr>\n
9<\/td>\n0.8<\/td>\n1.25<\/td>\n8.62<\/td>\n1.04<\/td>\n6.89<\/td>\n-2.11<\/td>\n<\/tr>\n
10<\/td>\n0.7<\/td>\n1.43<\/td>\n10.04<\/td>\n1<\/td>\n7.03<\/td>\n-2.97<\/td>\n<\/tr>\n
11<\/td>\n0.8<\/td>\n1.25<\/td>\n11.29<\/td>\n0.97<\/td>\n9.04<\/td>\n-1.96<\/td>\n<\/tr>\n
12<\/td>\n0.9<\/td>\n1.11<\/td>\n12.4<\/td>\n0.97<\/td>\n11.16<\/td>\n-0.84<\/td>\n<\/tr>\n
13<\/td>\n1<\/td>\n1<\/td>\n13.4<\/td>\n0.97<\/td>\n13.4<\/td>\n0.4<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The thing to take away from this is that at the end of the 13th month, I have made some money. It may not seem like a lot of money, but the stock price did not go up; it’s exactly where it was when I started<\/strong>. In general (though not always), the stock market goes up over long periods of time (5-10 years), so I’ll be even better off than in this pessimistic (though timely) example.<\/p>\n

Sure: I could’ve made more money if I sold all that I had during the 4th month (when the stock price was high), and then just waited until the 10th month (when the stock was low) to buy everything back. However: that would require a great deal of prognostication.<\/p>\n

With dollar-cost averaging, I can make money withour requiring the stock to go up. Of course, if it goes down, I don’t make money–unless I keep investing and it eventually goes up.<\/p>\n","protected":false},"excerpt":{"rendered":"

at the end of the 13th month, I have made some money. It may not seem like a lot of money, but the stock price did not go up; it’s exactly where it was when I started<\/strong>.<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[86],"tags":[85,87,84,222,83],"class_list":["post-196","post","type-post","status-publish","format-standard","hentry","category-finance","tag-bear-market","tag-burton-malkiel","tag-dollar-cost-averaging","tag-finance","tag-stocks"],"jetpack_featured_media_url":"","jetpack_likes_enabled":true,"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/poojanblog.com\/blog\/wp-json\/wp\/v2\/posts\/196","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/poojanblog.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/poojanblog.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/poojanblog.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/poojanblog.com\/blog\/wp-json\/wp\/v2\/comments?post=196"}],"version-history":[{"count":8,"href":"https:\/\/poojanblog.com\/blog\/wp-json\/wp\/v2\/posts\/196\/revisions"}],"predecessor-version":[{"id":205,"href":"https:\/\/poojanblog.com\/blog\/wp-json\/wp\/v2\/posts\/196\/revisions\/205"}],"wp:attachment":[{"href":"https:\/\/poojanblog.com\/blog\/wp-json\/wp\/v2\/media?parent=196"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/poojanblog.com\/blog\/wp-json\/wp\/v2\/categories?post=196"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/poojanblog.com\/blog\/wp-json\/wp\/v2\/tags?post=196"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}