Are We Near a Top, and If So, What Now?


The market has been on a torrid pace since it bottomed out last year.  Rarely will you ever see a time where growth is as fast as it has been during the last year.  After bottoming in May of 2009, the market has been climbing, with the Dow going from a low of 6500 to a recent high of over 11,100 in just under a year.  The picture on the cover of Barrons this week was of a bear glued to the windshield of a bus driven by a bull, with the marquee for the bus reading “12000” as the destination.  If the market moves up just another 15% or so, it will move past the old record high.

During the fall from about October of 2008  through May of 2009, many watched as their fortunes decayed.  Many who were looking to retire in the next few years decided that they would need to continue to work for a few more years.  Some bought in at various points during the fall, expecting it to be the bottom, only seeing stocks start to fall afresh.  I’ve no doubt that some decided to sell everything in despair just as the market was reaching the bottom.  (It has often been seen that the crowd tends to buy at tops and sell at bottoms, hence the popularity of contrarian investing.)

It is therefore amazing that in a short year the markets have regained most of their former value.  Of course some stocks have not come back and may never do so, but mutual funds that hold large baskets of stocks should be about where they were.

Now, having come up so far so fast, it can be expected that the market will take a breather, falling back a bit.  Events such as flare-ups in the Middle East, Greece’s (and Europe’s in general) monetary problems, and talk about raising interest rates to quench inflation are also indicating that the market may be ready to pull back a bit.  Based on this scenario, the actions that should be taken are as follows:

1) If one will need capital in the next few years, for example for retirement, it would be a good time to pull what will be needed over then next 5-10 years out and put it in fixed-income securities and/or cash.

2) If one is still saving and growing wealth, infusions of cash into the market should continue, but it might be wise to continue to stockpile cash for a little while.  Wait for  a pullback in the stock(s) of interest to invest.  Note that it would not be a good idea to just sell securities outright if you still have a long time horizon unless the companies themselves are changing, (see the earlier post on “when to sell”) or a position has grown larger than one is comfortable with.  These fluctuations will mean nothing in 20 years, and you could move a big move upwards if you try to time the market. 

Note that while it is easy to see that the market may be running out of steam, it may go on for quite a bit longer than one would expect.  It is therefore important to continue to invest – just maybe with less zeal than when the market looked cheap.  Having interest rates so low may also add more life to the market than expected.  There is a saying to not “Fight the Fed.”  While they will have to raise rates if inflation picks up, they may also push the market higher in the mean time if banks actually start lending again.  This is another reason not to jump ship if you are investing for more than 5-10 years.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Dollar Cost Averaging


Today I’m going to discuss a common technique called “Dollar Cost Averaging,” and a variant on this strategy.

In Dollar Cost Averaging (DCA), one invests a fixed amount of money on a regular basis.  For example, an investor may put $1000 in a mutual fund every month regardless of market conditions or other factors.  By fixing the amount, the effect is to buy more shares when the price is relatively low, and less shares when the price is relatively high; therefore, even if the market stays essentially flat, just moving up and down between a couple of limits, because more shares are bought at the lower prices, the cost basis will be below the average of the price range, so a profit will be made.

This is a very automated, easy, no-decision way of investing that is a good approach.  It can also be improved upon, however.

Looking at the chart for any stock, one sees that the price tends to increase for periods, then decrease for periods.  For a stock that is growing (the kind recommended here), the lows will always be higher than the previous lows, and the highs higher than the previous highs – this is called an “uptrend”.  Because the stock does not move randomly, as it falls in price it becomes more and more likely that it will stop falling and move upwards again (again, we’re talking about stocks that over the long-term are growing).  The modification to the dollar cost averaging strategy is then to wait for periods where the stock has fallen in price before making investments.  In doing so, a better price will be gained than that gained through blind averaging.

Choosing when to buy in this method is somewhat arbitrary.  One could buy when the price falls for three days in a row, or when the price drops by 10% or so.  Obviously a method should be chosen such that the stock can be bought regularly.  Waiting for the price to drop by 20%, say, before making a purchase, may result in few shares actually being purchased while the stock climbs to the sky, leaving you behind.

Refer a friend – link to this page: https://smallivy.wordpress.com

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

When to (and Not to) Average Down


Averaging down is a time-honored investing tradition.  It is when a stock you have picked has dropped 10-20%, at which point you decide to “average down” by buying more shares.  The idea is that your cost basis is now lower, so when the stock shoots back up you’ll be in good shape.

While this sounds good on paper, often we average down just because we can’t admit that we picked a lemon.  We think, “Gee, I thought it was good at the original price — now it’s really a bargain. ”  Our pride keeps us from taking a loss, instead putting more good money after bad, and ending up with a portfolio full of losers, having sold all of our winners when they gained 10%.  Often, having held a loser for a long time, we sell if it returns to the original purchase price because now we are “breaking even”.  This is usually the point at which the stock goes through the roof to new highs. 

In general, when I am buying a stock, I plan ahead of time to dip my toes in, and then buy on price dips until I’ve accumulated a sufficiently large position.  This may involve averaging down (unless it is moving up, such that the dips are progressively higher), but this is part of the plan.  I’m not buying more to feel better about the loss– I’m buying more because that is my plan.

After I’ve accumulated as many shares as I had planned, if the stock takes a substantial dip, I take a step back and reevaluate the stock.  Is the company’s earnings growth slowing down after a torrid pace, and therefore is the price-earnings multiple it carried before may no longer justified?  Did I miss something about the stock?  Is the entire sector slowing down, and is this stock just being pushed with the tide?  If I find that the answer is one of the first two reasons, I’ll generally just sell the stock, take my  loss, and get on with life.  If the cause is the third reason, I may average down if I don’t have a better prospect because the company may gain market share from the weaker competitors and race ahead of the sector when it recovers.

Refer a friend – link to this page: https://smallivy.wordpress.com

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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