Should you DCA (Dollar Cost Averaging)? According to Wikipe...
Should you DCA (Dollar Cost Averaging)?
According to Wikipedia, DCA is an investment strategy that aims to apply value investing principles to regular investment. The term was first coined by Benjamin Graham. Graham writes that dollar cost averaging "means simply that the practitioner invests in common stocks the same number of dollars each month or each quarter. In this way he buys more shares when the market is low than when it is high, and he is likely to end up with a satisfactory overall price for all his holdings." The technique is so called because of its potential for reducing the average cost of shares bought.
There are 2 strategies. The original Benjamin Graham (BG) strategy is to buy the same dollar value of stock every month or quarter. The second strategy is the market timing (MT) strategy where you buy a fixed number of shares at times when the price is low using TA.
Lets consider 3 stocks: AEM, iFast and Alita Resources
AEM
BG strategy
According to Wikipedia, DCA is an investment strategy that aims to apply value investing principles to regular investment. The term was first coined by Benjamin Graham. Graham writes that dollar cost averaging "means simply that the practitioner invests in common stocks the same number of dollars each month or each quarter. In this way he buys more shares when the market is low than when it is high, and he is likely to end up with a satisfactory overall price for all his holdings." The technique is so called because of its potential for reducing the average cost of shares bought.
There are 2 strategies. The original Benjamin Graham (BG) strategy is to buy the same dollar value of stock every month or quarter. The second strategy is the market timing (MT) strategy where you buy a fixed number of shares at times when the price is low using TA.
Lets consider 3 stocks: AEM, iFast and Alita Resources
AEM
BG strategy
Assume you bought SGD5,000 of AEM shares every quarter as follows:
Date bought Price No. of shares
1) 14/12/2021 5.25 952
2) 14/03/2022 4.03 1,240
3) 14/06/2022 4.05 1,234
Total investment = SGD15,000. Total shares = 3,426 Average cost = SGD4.38 Current price = SGD4.38
MT strategy
Date bought Price No. of shares
1) 14/12/2021 5.25 952
2) 14/03/2022 4.03 1,240
3) 14/06/2022 4.05 1,234
Total investment = SGD15,000. Total shares = 3,426 Average cost = SGD4.38 Current price = SGD4.38
MT strategy
Assume you bought 1,000 shares of AEM as follows:
Date bought Price No. of shares
1) 14/12/2021 5.25 1,000
2) 08/03/2022 3.80 1,000.
Average cost = SGD4.53
AEM is a stock with good fundamentals. For both techniques, the average cost is about the same and the loss is minimal. Continue with DCA. When the bear market is over, the price will rise and the trade will be profitable.
iFast
BG strategy
Date bought Price No. of shares
1) 14/12/2021 5.25 1,000
2) 08/03/2022 3.80 1,000.
Average cost = SGD4.53
AEM is a stock with good fundamentals. For both techniques, the average cost is about the same and the loss is minimal. Continue with DCA. When the bear market is over, the price will rise and the trade will be profitable.
iFast
BG strategy
Assume you bought SGD10,000 of iFast shares every quarter as follows:
Date bought Price No. of shares
1) 20/09/2021 10.05 995
2) 20/12/2021 7.57 1,321
3) 20/03/2022 5.75 1,739
4) 20/6/2022 4.03
Total shares = 4,055 Average cost = SGD7.40 Current price = SGD4.57
MT strategy
Date bought Price No. of shares
1) 20/09/2021 10.05 995
2) 20/12/2021 7.57 1,321
3) 20/03/2022 5.75 1,739
4) 20/6/2022 4.03
Total shares = 4,055 Average cost = SGD7.40 Current price = SGD4.57
MT strategy
Assume you bought 1,000 shares of iFast as follows:
Date bought Price No. of shares
1) 20/09/2021 10.05 1,000
2) 11/01/2022 7.28 1,000
3) 22/07/2022 3.69 1,000
Average cost = SGD7.00
You made a loss for both techniques. But the loss is lower with the MT technique.
Alita Resources
MT strategy
Date bought Price No. of shares
1) 20/09/2021 10.05 1,000
2) 11/01/2022 7.28 1,000
3) 22/07/2022 3.69 1,000
Average cost = SGD7.00
You made a loss for both techniques. But the loss is lower with the MT technique.
Alita Resources
MT strategy
Assume you bought 1,000 shares of Alita Resources as follows:
Date bought Price No. of shares
1) 03/12/2018 0.31 1,000
2) 20/12/2018 0.245 1,000
3) 31/01/2019 0.16 1,000
4) 17/07/2019 0.114 1,000
5) 06/08/2019 0.075 1,000
Average cost = 0.181
Alita Resources was a miner of lithium spodumene concentrate. The price of lithum was skyrocketing then. Alita was formed from a merger of Alliance Mineral and Tawana Resources to take advantage of economy of scale. It won hundreds of millions of dollars of contracts at high lithium prices.
But the price crashed. So you decided to DCA. What happened was that the price of lithium underwent a deep correction. Buyers decided not to honour their contracts. Creditors pulled out. Yet, analyst reports were positive. So was the CEO. Nothing negative were heard from them. The company is now undergoing bankruptcy proceedings.
So you shouldn't DCA just because a stock is cheap based on TA. The fundamentals are important. You should DYODD. You should find out the price of lithium, etc.
Conclusion
DCA shouldn't be applied to all stocks. You can use it for stocks with good fundamentals whose prices will recover after the stock market rout is over. The MT technnique is generally better compared to the BG technique. You shouldn't use DCA for stocks whose prices keep falling. You should cut loss early and then buy back when it's near the bottom. Don't just DCA because a stock is cheap based on TA. You should find out its fundamentals and why the price kept falling. Or you may lose all your money when the company goes bankrupt.
$AEM SGD (AWX.SG)$ $IFAST (AIY.SG)$ $Alita Resources (40F.SG)$ $SamuderaShipping (S56.SG)$ $Jiutian Chemical (C8R.SG)$ $S&P 500 Index (.SPX.US)$ $Nasdaq Composite Index (.IXIC.US)$ $SIA (C6L.SG)$ $RH PetroGas (T13.SG)$ $Rex Intl (5WH.SG)$ $Golden Energy (AUE.SG)$ $Geo Energy Res (RE4.SG)$
Date bought Price No. of shares
1) 03/12/2018 0.31 1,000
2) 20/12/2018 0.245 1,000
3) 31/01/2019 0.16 1,000
4) 17/07/2019 0.114 1,000
5) 06/08/2019 0.075 1,000
Average cost = 0.181
Alita Resources was a miner of lithium spodumene concentrate. The price of lithum was skyrocketing then. Alita was formed from a merger of Alliance Mineral and Tawana Resources to take advantage of economy of scale. It won hundreds of millions of dollars of contracts at high lithium prices.
But the price crashed. So you decided to DCA. What happened was that the price of lithium underwent a deep correction. Buyers decided not to honour their contracts. Creditors pulled out. Yet, analyst reports were positive. So was the CEO. Nothing negative were heard from them. The company is now undergoing bankruptcy proceedings.
So you shouldn't DCA just because a stock is cheap based on TA. The fundamentals are important. You should DYODD. You should find out the price of lithium, etc.
Conclusion
DCA shouldn't be applied to all stocks. You can use it for stocks with good fundamentals whose prices will recover after the stock market rout is over. The MT technnique is generally better compared to the BG technique. You shouldn't use DCA for stocks whose prices keep falling. You should cut loss early and then buy back when it's near the bottom. Don't just DCA because a stock is cheap based on TA. You should find out its fundamentals and why the price kept falling. Or you may lose all your money when the company goes bankrupt.
$AEM SGD (AWX.SG)$ $IFAST (AIY.SG)$ $Alita Resources (40F.SG)$ $SamuderaShipping (S56.SG)$ $Jiutian Chemical (C8R.SG)$ $S&P 500 Index (.SPX.US)$ $Nasdaq Composite Index (.IXIC.US)$ $SIA (C6L.SG)$ $RH PetroGas (T13.SG)$ $Rex Intl (5WH.SG)$ $Golden Energy (AUE.SG)$ $Geo Energy Res (RE4.SG)$
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101660796 : what if the fundamentals is strong but price keep rising? should we dca?
High Profit Low Loss : True, cheap can be cheaper, especially for value trap stocks!
bullrider_21 OP 101660796 : If the fundamentals are strong, I would rather buy more at a lower price than average up at a higher price.
48961688 : Thanks for sharing![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
bullrider_21 OP 48961688 : yw my friend.
Bull FYC : hi normally how you decide to cut loss? based on TA, fundamental, or a certain % decline in price? sometimes I find myself cut loss at or near the bottom
102316999 : hi bull, what is good price to sell aue for today?
bullrider_21 OP Bull FYC : Hi. Good question. I cut loss based on %. If you buy a stock, cut loss when the price falls 10%. If you short sell a stock, buy back when the price rises 10%. Why 10%? Let's say you bought a stock at $1. It fell 8%. The next day, it rebounded to $1.05. So 10% prevents you from selling too early in case it rebounds. If you are disciplined in cutting loss, it ensures you minimise your loss and preserves your capital.
bullrider_21 OP 102316999 : Hi. For today, maybe can sell at 0.805- 0.81.
102316999 : Thanks bro![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
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