Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (1074)	12/29/1998 7:11:00 PM
From: Jurgis Bekepuris	Read Replies (1) \| Respond to of 1722

Hi guys, I just talked to a friend about your article on dollar-cost averaging (DCA). Couple thoughts. DCA works well in your examples because WMT and IBM suffered a drop from which they recovered. There are two scenarios where the DCA works against you. First, the stock that climbs up and then drastically drops and never recovers. Though DCA decreases the effect of such drop, because you did not buy much at the top, it does not fully eliminate the downside. The second, and more severe situation is a stock that has continuously declining price until the company goes bankrupt or is bought out below any reasonable price. I assume that you had these drawbacks in mind when you recommended "industry leaders" such as IBM and WMT or S&P500. Such companies have much lower probability of suffering one of two fates described above. DCA also does not address the question of fluctuating income. If, for example, I have $1K to invest this year, and $5K to invest next year, I cannot DCA into IBM because I would be buying more shares of it next year regardless of the price. On the other hand, if I only commit $1K of the next year's investment money to IBM, I have to find places for the other 4K. Of course, this is a problem only for investors with fluctuating investment budgets. Similar problem occurs if I have to sell one of my holdings. The gross proceeds should be DCA'd into something, but it's not clear how to do that while preserving the principle of DCA. Anyway, these are minor points. Good article! Have fun Jurgis