Is dollar cost averaging a good strategy?

Dollar cost averaging is a strategy that is probably used by all of us to varying degrees.

As with all strategy's there are positives and negatives.

A common strategy appears to be one of continual dollar cost averaging with the expectation of selling at a price higher than your average cost at some point.

The problem that I see with dollar cost averaging into a rising market is that it continually introduces risk. The higher the market goes, the more downside risk it develops. As market risk increases, so too does your exposure. From a risk management point of veiw, this is the exact opposite of what I would be trying to acheive.

Dollar cost averaging can be used to reduce risk but it can also introduce risk.

Would be interested to hear others thoughts on this.


C

 

Totally get what your saying. If I could eg. buy 10kg today @33/oz & hang onto it until $49/oz. Do it, great. But If I can only afford Eg 1kg in this dips timetable (maby). So I stack. Difference is shorting instead of stacking. Why stack then short you ask? Because they can't afford to because of dollar cost averaging. Not enough profit to sell. catch 22 & until it goes higher... Took 20 years last time.
I'm going to buy IF it gets to $27 then sell at $47, with my luck it won't go down or up, just sideways..

 

Hi, is there a link explaining dollar averaging for us beginners? I have an idea that I know what it is but wouldn't mind some more info.

 

That will give me $1000 profit for every 50/oz.

 

calculate the cost of your silver then divide it by how many oz you have.
Mine I admit has jumped to $39/oz I worked out. Crap!

 

"Must have missed that one at school"

 

I get it, thanks for the link,

Dollar averaging sounds like a good idea but I am too much of an impulse buyer, plus it might be harder to buy a set dollar amount of silver if the silver isn't available.

 

Look at it as a statistical thing. For someone who is to accumulating (stacking) silver month by month, sometimes you'll strike it good, sometimes you'll strike it bad.

Also remember that the Silver price is trending upwards so you can not look at your current average buy price and expect to always be able to get silver at or near that price in the future. You have to expect that your 'average' buy price is going to be increasing slowly over time. So you need to extrapolate your average buy price upwards to work out what a 'good' price point in the future may be or just say "I am happy to strike if I am within 15% of this average"

 

depends,

if the money that you use to buy silver with, is the type of money which doenst have a set MATURITY DATE, ( ie. will have to
sell 10 oz in sep to pay the rego ) than just BUY AS MUCH AS THAT PART OF YOUR BUDGET ALLOWS, if you SELL, than make sure
the proceeds go back into precious metals.

keep doing that, and maybe one day you will hit 1000 oz silver and than a bull run occurs,...

 

If only I had been able to sleep last Friday night/morning my dollar cost average would have been much lower! Impulse buy in what was supposed to be a dip of a few dollars that turned into a massive dip on Monday.

However, in the end my initial goal/ounces will be reached (within sight....almost....just around the bend) at a better average if I can pick up a bit more in the very near future at a reasonable cost.

If the price had not dropped I may have sat back and waited till my next purchase, but since the option to buy is there I probably will so that my DCA is lower. Hopefully that way I can avoid buying on rising prices later and reduce that risk as noted by Contrarian (sorry not sure how to do two quotes in one post).

After my goal is reached (as arbitrary as it is) I will feel better about adding silver here and there as I can, but will probably aim for more gold, depending on what the prices of each are like. If silver keeps going down or takes a while to recover I will need to assess whether this is a sign to buy more or move on to something else.

Naturally if you wish to keep buying a commodity as prices rise there will be risk, but if you are in the accumulation stage with regular, but limited funds, then it is hard to do other than buy bit by bit on a regular basis. Perhaps try and buy a few ounces more if there is a small dip, but you could wait forever and not buy anything. At some point it might be necessary to revise goals and change course to a different commodity - even if it isn't as shiny. Then it becomes about diversification.

 

I see cost averaging as a long term technique , IE you just buy regularly and for the long term 5-10 years as opposed to in and out within say 2-3 years or shorter .

If you are not in for the long term then I would hazzard a guess that cost averaging is not for you and suggest that you just BTFD . Which is also a form of cost averaging but only allows you to make sporadic purchases and of course exposes you to missing or not actually buying the bottom and risking a loss over the short term.

A simple example is , say you bought 2 oz @ $30 one month and then 2 @ $35 the following month your cost average is $32.50 per oz for your four oz , lets say you BTFD and buy 4 oz @ $32.50 thinking that is the bottom for now and then it drops another $2 per oz , your cost average is $34.50 per oz so the actual cost to you is $2 per oz until such time that the cost per oz increases .

If the price stays the same past your wanted out by date then you are at a loss of $16 spread over the 4 oz .

For the cost averaging on the way up there is also a loss but it is only $4.50 all up spread over the 4 oz compared to a minus. And of course the comfort of not needing or wanting to to sell because you are in for the long term.

Of course this could all work in reverse to and the price could go up.

Just my 2 grams worth.

 

The only 'strategy' I have is to accumulate as much Silver and towards the end, Gold as humanly possible.

This involves BTFD for Silver and then reselling (haven't done this yet ) for either more fiat or Gold or more Silver.

Cost averaging is something I use to have a basic look at how I stand but I would never sell something I bought at $40 for $35 even if cost averaging I gained.

 

ContrarianI think that there are two groups of stackers on the SS site. The first one is where the art of cost averaging is very important as they buy large amounts at any one time in an endeavour to make a profit and to them it is very important to have as much info at their fingertips in order for them to trade successfully. A dollar swing up and down can make a huge difference.

The 2nd group is where I think most of the SS members are .\, They are the small to medium ones with many of them starting stacking in 08,09, 010 .They buy in rather small lots including coins and small bullion bars. They start staking and slowly the stack gets bigger 50ozs...100ozs... 200ozs... 300ozs. A number of posters on this site have often talked about the 1000ozs club. Even our most talked about poster Auspm mentioned this as his goal. You gain confidence as you stack grows bigger and as you look back you tend to marvel at the bargains you have bought at todays prices. They don't sell too much and they are mainly buyers.

Lately there has been another group that has just joined SS and for them it has been a hard road to hoe. I often think of what I would do if I faced a situation that has unfolded in recent weeks. Eg. Let's say you decided that 66 fifty cent round was the way to go. You bought at intervals, 1-@$14 ..10@$15... 10@$16...The price was rising a $1 an oz per day...You panicked and bought 20@$17. You have spent a total of $790 with an average buying price of $15.80. The spot price of silver drops what do you do? Select one of the following.

1. Do nothing and hope the price goes up again

2. Run for the hills and sell and take a loss

3. Buy more as cheaply as possible below $15.80 to bring your cost average down.

I would take option 3.

Recently I posted about one buy too many. About a month ago I bought 3 Kooks for $45 after reading about them here on SS. Then the prices started to really hike up. I decided to buy another 4 at$52. I have got about 10ozs of silver coins on layby at an average of $47oz. I will still buy as many times before I have use layby buying and have got some real bargains. My word is my honor and I will still buy. What will I do. I will try to find some 1oz kangaroos, kooks, etc at much lower prices and cost average. It doesn't really matter what I buy as long as it drops my average down on these purchases. This is the fist time I have ever stacked 1oz .999 coins. If I had my time over would I still buy? Of course I would! Silver could well have been $55oz by now.

Big SS are like professional punters. It is in their best interest to get as much info as possible and to cost average to get the odds in their favor as much as possible. I would rather see them make some honest gains than the banksters of NY and London

To all you that have just started stacking, don't be depresses like silver is now. Soon it will be a bright sunny silver day.

Regards Errol43

 

Agree with everything you are saying.

As you point out with option 3, DCA in a falling market reduces your average price and reduces your market risk. On the flipside, DCA in a rising market increases your market risk. It cant work one way and not the other.

How well DCA works then comes down to the relationship between greed and fear. If you kept dollar cost averaging up the spike but then stopped buying when the market crashed due to fear then DCA is not working from a risk management perspective.

It is generally accepted that people keep buying when the market is rising (and in my opinion increasing the risk of their position) but to buy the correction is akin to "catching falling knives" (which is actually reducing your risk if it lowers your average buy price).

I'm not saying DCA is not a good strategy. I'm saying that depending how it's used it can introduce risk to your position.

This discussion will be of no interest to someone who wants to continually keep buying long term in the expectation that silver will end up at $500/oz.

In this case risk management is something that should be discussed with a clairvoyant.

The problem is that we know(or at least we should know) that nothing keeps going up continually long term.

C

 

Actually what you're doing - buying whenever you have some money (as opposed to holding on to your money and trying to time the dips) - IS EXACTLY DOLLAR COST AVERAGING...

 

So you're viewing each purchase as a new trade. To determine whether you've made money you'll need to take the average.

The average is the only thing that matters.


C

 

Median is the middle not the average

 

I know it is a common assumption on here that silver is going to the moon so dollar cost averaging is bullet proof,

BUT

If we look at examples - it's not the magic formula that we all assume.

For a classic example of it all going wrong have a look at Telstra over the last 5-10 years. If you had dollar cost averaged that one at any stage it would have only magnified your losses.

If we look at silver from from the early 1980s through to the late 2000s it would also have shown a very poor return. And before everyone starts saying silver was held down - like most investments silver goes in fits and starts. If silver now shoots up to $50 oz and stays there you will still do poorly if you are only dollar cost averaging.

Dollar cost averaging was pushed (and still is to a degree) but the superannuation industry. It makes them look good if prices go up and makes them look smart if prices go down. However - there are NO super wealthy or Buffet type people who dollar cost average. They make their money when they buy. It is a conscious decision to purchase at what they consider a cheap price - not just every tuesday.

Time your purchases (and sales) and you will do far better than the average punter. Make a decision about what price point silver (or any investment) is good value, why it is good value and at what point you will take a profit/loss and make your purchases/sales around that point. You wont get it exactly right but I guarantee you will do OK if you put a bit of effort into it.

Also look for different prices points. If bars are the current rage then change your bars for coins. When 1966 50s are the sort after coin - exchange for 1937 crowns for example. It wasn't that long ago when I needed to sell alot of 1966 50s (several thousand) and I had trouble moving them and had to discount because they weren't popular. Now if I put them on here my arm would be bitten off and the discount has now become a premium.

Timing is not the most important thing in investment but it is right up there with oxygen!!

malachii

 

I hear ya errol43, we're paddling the same boat. My only option now, in my opinion, is to keep buying while the price is low/er in order to bring my DCA down.

I also like the look of the coins, so that helps me feel better about it.

 

if you DCA in $ to Oz thats fine but dont forget the premiums different bars, coins, rounds etc maintain, I run a +5% premium to cater for this