Bulls To Bears: Wisdom and Dollar Cost Averaging


If you have been following the stock market over the past few months, you know that things have been very volatile of late. For a lot of people, all the market turbulence is unsettling. After all, after a stock market correction, how do you know when the time is right to put your money in the market? and when to pull it out?
On occasion every trader, or stock picker dreams of buying a stock right before it skyrockets, turning them into a millionaire overnight. Many traders and investors tend to take short cuts to try and create wealth by trying to time the market. They try to get in before a certain stock, or the DOW takes off... Wouldn’t that be great? But, is it too good to be true? When you purchase a good stock on market dips it isn't. Some traders might get it right once in a while, but unless your "Carnac the Magnificent" you won’t be able to call a stocks ultimate bottom every time. However, we have some good news for you; there is a way to for you to time the stock market and create the wealth your looking for over time with Dollar Cost Averaging (DCA), this involves investing money into a stock at different prices, willingly better ones. 


The main advantage of DCA is so traders can buy more of their stocks at lower prices rather than at higher ones. Below we are giving you an example of an investor who makes 12 smart buys in a year $200 worth of shares each month when a good stock dips and declines and the annual trading range for this particular stock is between $6 and $15 for the year, and how you could avoid the risk of buying $2400 worth of these shares at its peak prices if you were to made a 1 time purchase. 

Here is how dollar cost averaging would look if you broke $2400 down as an IRA investment over 12 months making smart random purchases each month of declining GE stock. For this example below we used the actual 12 month trading history for (NYSE: GE) General Electric between (1)January 2018 and (12)December 2018 when the stock traded between $15 and $6.

2018 Buy dates     Amount invested      Price per share      # Shares purchased

January--------------------$200.00-------------- $14.21-----------------14.00
February-------------------$200.00---------------$15.03-----------------13.00
March---------------------- $200.00---------------$13.24-----------------15.00
April-------------------------$200.00---------------$12.82-----------------15.00
May------------------------- $200.00---------------$15.29-----------------13.00
June-------------------------$200.00---------------$12.78-----------------15.00
July--------------------------$200.00------------- -$13.64---------------- 14.00
August----------------------$200.00------------- -$12.97-----------------15.00
September-----------------$200.00-------------- $11.22-----------------17.00
October---------------------$200.00-------------- $12.00-----------------16.00
November------------------$200.00---------------$7.26-------------------28.00
December------------------$200.00---------------$6.48-------------------31.00

Total $2,400.00 - $12.46 average and 206 shares owned with a Current Price of GE $10.40 - this results in a current Loss of $430 or $2.06 -17% per share, still within striking distance if GE rebounds above $12.46.

If you had decided to put all of the $2400 of GE in December at a $14.21 the average you would have had on 176 shares at $10.40. You would be down -$4.22 a share or -$670 = -28% with an  $14.21 per share average. 

(DCA in this scenario Leaves you with more shares of GE and a lower cost per share, as well as smaller % loss .)

A downside to DCA is that investors don't have an opportunity to buy additional shares at lower prices if the market is in a prolonged bull market. However, even in a bull market on big down days or a sharp market correction it does allow an investor to reduce their average cost as they hold the shares through dollar cost averaging.

As you can see from the scenario above is why we know DCA is so effective and is so simple to implement that you can get started investing in your future fairly easily with a small amount of money, and consistently invest it over time and that you don’t need a lot of money to start trading. You should always be investing consistently, even when the market is down (more shares for your capital), you continue to invest this way it’s a savvy, tried and true way to build wealth at the same time limiting some risk.

Another negative aspect of trading this way with DCA is you incur more fees. Dollar cost averaging means making more transactions, which can result in higher brokerage fees. But you benefit when you don’t pay any transaction fees if you are investing in a 401k or an index fund that doesn’t charge commissions.

There is always risk involved when your trading stocks or investing in anything, and you need to be very careful. But, you can reduce a lot of risk and build a nice piggy bank, for yourself using the dollar cost averaging strategy we teach. When our members use a combination of the dollar cost averaging and our market timing strategies to buy stocks they tend to see their investments rise in value and who doesn't like to see a drastic increase in their investments? Bare in mind, investing is for your future, and should always feel like a long drawn out process. Historically, the stock market has risen over time. So, don't take short cuts to wealth, by trying to time the market! Instead adapt to a DCA strategy.

In conclusion, the point of dollar cost averaging is not to try and time the market or a particular stock– it is to save or invest with amounts of money you can afford. The amount you can invest could be as low as $25 a month or into the thousands. The point here is that you get into the habit of investing, and dollar cost averaging provides you with an easy and affordable way to invest your money into stocks on a regular basis with small funds.

If you like the idea of using DCA as an investment strategy you’ll benefit from subscribing to our FREE NEWSLETTER. Our articles and Trading Tips, are there for all traders and investors to explore as well as some of our tools and techniques we are show our paid subscribers. 

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Again, the time is NOW to invest in your future success! We look forward to seeing you soon.

Till Next Time... Happy Trading!