Dollar cost averaging - Another view

Image courtesy:about.com

In my earlier post about dollar cost averaging or long term investing during down markets I had written how it was beneficial to dollar cost average during a bear market.
This morning I was looking at another article on Investor Business Daily's newspaper. They had a small article on dollar cost averaging specifically for down markets or during markets with bearish trend. This article featured under their Myth Buster title titling "Averaging down can be a poison". The author takes an example of Lehman brother's stock and how one would have suffered major losses in such a condition and instead ask to dollar cost average in bullish markets.

My takes on this and comments are slightly different. My focus would be to dollar cost average on an index vs. a stock. Thus if any particular stock is burned then my risk of loosing all my money is certainly lessened.

The article took an example of AIG and explained how an investor would take ages to get back the fortune spent. I would have rather put money in the finance sector, probably in an ETF or a mutual fund.

Of-course buying during market correction is a better strategy but then who can identify a bottom and then a correction.

One strategy recommended which I might partially agree is too sell off if losses get steeper than 7-10%.

What do you think?

Sane Investing in an Insane World - review

Recently I have been reading this book . Definitely some takes and some "non" takes from the book. Cramer goes over different stocks to be purchased at different times in the economy. Once an industry is picked , next is the choice between various companies within it.
Here are some guidelines that are outlined in the book for comparing stocks in an industry
1. P/E ratio, this seems to be the #1 principle.
2. Growth rate of a company: Online sites like thestreet.com or reuters or yahoo finance will list the rate the company is growing. This should be in sync with the growth rate.
3. Dividend comparison: Yield is the trick, Compare yield vs. the actual dollar amount of the yield.
4. Think outside the box: Real business world. Are there some take over or other orders lurking for the company?

5. How does the company perform vs. S&P 500. A bargain is a company with P/E lesser than the industry but has better sales and earnings faster. For example in the current market non cyclical stocks would normally outperform the other ones in the market.

As an example Coke vs. Pepsi comparison is listed at http://seekingalpha.com/article/91789-coke-vs-pepsi-cramer-s-mad-money-8-19-08 Seeking Alpha

More useful tips coming up in the upcoming blog(s).

Disclaimer : Author does not hold KO or PEP at the time of writing the blog and is provided as an example.

Long term Investing during down markets

People are always looking for ways to make money. In a uptrend market no one wants to miss a boat and in a downturn is always about how can I recover the lost dollar.

Investing during down times could be hard especially around the pessimism that may surround the news. It's been said that more or most returns could be fetched by investing in a downturn.

Although past is not an indicative of the future lets take a look at examples of investing in some bear markets in the past and how investing during bear markets can have profits of its own.

The rule is start systematic investments(SIP) for every specific period in a bear period until the next positive trend or until the value at last instance is lesser than the current one.

Let us start with the oil crisis in 1973 which started around October 1973 which further led the downfall to the stock market. Assumption is that one started investing in the NASDAQ index back in June 1973 in a systematic investment plan until say September of 1974 . Between this period the NASDAQ went from 108.54 to around 59 with SIP of $100/month. For a period of 15 months this would mean an investment of $1500 with an average price of $84 for the index with roughly 17,85 shares.
courtesy:finance.yahoo.com

Lets consider the same investment plan for investments into savings account at the same timeframe with an average of an savings interest rate from 10% to 6% (source http://en.wikipedia.org/wiki/Image:Federal_Funds_Rate_%28effective%29.png ). This is effectively money wit 8% rate of return for a principal of $1500.

Lets first have an investment period of 5 years by which the NASDAQ index went up to around 130 which (not inflation adjusted) is an increase of roughly 54%. This money will now be taxed
Our initial investment now in the share market is worth around $2321 (which after tax will be $2115) whereas our money in the bank would have grown to around $2007 with the assumption that the tax bracket is 25% and the money is kept in an after tax account. The net (compounded interest) gain here is 33%.


This is money I consider good for a long term investment (5- 10 years) vs. a very long term (more than 10 years) investment.

Applying the same hypothesis to other bear markets in the past from 2001 - 2003 and the 1979 energy crisis yielded promising results. A larger bear market meant more time to stay put into the SIP but saw good yields thereafter.

There are some assumptions made in this theory: Investor is starting to invest in the fund at this point or does not already have an SIP in the same fund from an earlier time.

In my second article I will try to analyze if buying during a bull market is lucrative. Stay tuned and let me know your thoughts.

The bear market investing for longer term looks to be lucrative.