DOLLAR COST AVERAGING STOCKS FOR BEGINNERS
One of the first things you might hear about when you start buying stocks for beginners is cost averaging. Everyone seems to advise you to dollar cost average your stock purchases as a matter of safety and for the best returns. What does this mean and is it really necessary?
First of all, if you are starting buying stocks for the first time with just $2,000 to $5,000 it might be difficult to cost average. What it means is to buy a little of a stock consistently over time which is thought to lessen the risk of having all your stock purchased at a time when it might be too high or low.
For instance, if you plan on buying 200 shares of Garmin (GRMN), you might do it all in one purchase or you might do it in segments. If you do it all at once, say at $32.00, then that is the price you have and from there is could go up or down. If it goes down then you will have a loss and nothing you can do about it.
If you decide to by the stock at four different times, maybe once a month for four months, then if the stock goes down you still have money to buy more. If in the first month you bought 50 shared at $32.00 and the next month is goes down to $30.00, you will then be buying 50 more shares at the $30.00 price for a net total of 100 shares at $31.00.
Here is the problem: dollar cost averaging is only good if the stock goes down! If you cost average your buys and it goes up, then you will be buying at a higher price. This is why, in my opinion, dollar cost averaging is a worthless principle that really means nothing and accomplishes little.
Stock market pundits, gurus, experst, and analysts always preach that beginners and anyone else should dollar cost average when buying stock. I think that is the biggest bit of bullshit ever as it mean nothing. This is another one of the things they throw out there to sound smart but if you think about it, it isn’t smart. Well, it is smart if the stock is going to go down but then if you knew that, you would wait for it to go down before you made your first purchase. Cost averaging is a concept for dummies if you ask me as it has very little logic.
No one can see the future and tell whether stocks will rise or fall. Dollar cost averaging works in a falling market but in a bull market it is NOT the thing to do as you may end up buying your additional shares at a HIGHER price than you could have if you have purchase them all at one time for one price.
