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What is dollar-cost-averaging?
In shares, dollar-cost-averaging is used to lower the average cost of
your purchase.
Just as an illustration using shares: -
Jan 2009 - 1000 shares at $5.00
Feb 2009 - 1000 shares at $4.00
Mar 2009 - 1000 shares at $2.00
The average cost of the above share = ($5.00 + $4.00 + $2.00 )/ 3 =
$3.67
The aim of dollar-cost-averaging is to mitigate a wrong timing of
purchase. If you purchased something at $5.00, the prices have now
fallen, in order to lower your overall average cost of purchase, you
will have to buy more at the lowered prices.
RISKS of dollar-cost-averaging
When the shares have fallen, people who blindly believe in dollar-
cost-averaging will put more money into the company whose shares have
fallen.
Then the shares fall further, he/she buys more, it falls further,
he/she buys even more. So much so that the cost of the shares is very
cheap. If the share price rebounds, the person can become very rich.
WHY SHARES FALL IN VALUE?
However, in many cases, there is a reason why the share prices have
fallen.
We almost always have to assume that the insiders know better than
we do.
Despite years of making the market more transparent, efficient and
with timely dissemination of information, it is still the insiders
and their inner circle that knows what is going on in a company best.
Doing dollar-cost-averaging is the easiest and surest way for a
person to loose an entire fortune. (if he/she does so without
assessment)
SO WHAT SHOULD WE DO?
The best way to do is to re-assess the company's financial
fundamentals, macro and micro economic fundamentals to establish a
NEW fair value for the company's shares and it's potential.
Once you have established that, you can then decide whether to throw
more money into the company.
If you have thrown in money in the past and it is lost, you must be
able to let go.
So the key thing to do is: -
* When markets rise, do not greed.
* When markets fall, do not fear. (But do not become a "rambo"
either)
In both cases, do your homework, then act on it. And when we say ACT
on it, we don't just mean, BUY or SELL. It could also mean do Nothing.
The key thing is, never take one or two simple concepts and treat it
as universal truth and apply it indiscriminately to all situations.
There is no free lunch!
We are a Researched Focused Mortgage Advisory that helps individuals
refinance or obtain the best fit home loans. We do not simply
emphasize cheap rates, but rather focus on a risk versus savings
approach.
You can approach us to evaluate refinancing of your home loan. The
service is free to you as banks pay us separately.
You have nothing to lose and everything to gain.
Email: loans@propertyBUYER.com.sg
Contact us
http://www.propertybuyer.com.sg/contactus.php
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About the Author
www.PropertyBuyer.com.sg is a Research Focused Mortgage Advisory that helps people to find Home Loans or Refinancing Loans. We do NOT simply emphasize cheap loans, but rather we use a balanced Risk versus Benefit approach and match that with the Home Owner's financial circumstances to create the best fit and customized home loan.
Call us at 6100-0608, Email us at: loans@propertybuyer.com.sg or contact us at: http://www.PropertyBUYER.com.sg/contactus.php
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