Buying Your Way Down

As the Dow Jones Industrial Average index (DJI) has fell 5.80% from 17,472.66 on the week of August 17, sliding another 3.57% on August 24. Looking ahead, the index looks like it will continue sliding, triggering more fears as traders exit their positions taking profits and cutting losses as it moves south.

Investor Monkey - Looking for Ideas

As the Dow Jones Industrial Average index (DJI) has fell 5.80% from 17,472.66 on the week of August 17, sliding another 3.57% on August 24. Looking ahead, the index looks like it will continue sliding, triggering more fears as traders exit their positions taking profits and cutting losses as it moves south.

While the traders are closing out their long positions, it creates an opportunity for investors to enter the market grabbing valuable shares while they are going on offer.

A quote by Warren Buffett goes:

Be Fearful When Others are Greedy and Greedy When Others are Fearful.

Right now, people are fearful for not knowing if the drop is a short one or if it is the start of the bearish trend since the market has been bullish since the last recession in 2008.

Should I Start Buying Today?

The fact is, we also do not know if prices will rebound sharper tomorrow or how long this bearish trend will last. To put all your money in and start buying today may regret if the stock price continues falling. The opposite is true also, if your wait till the stock price rebounds, will you be fearful that the price will drop tomorrow and regret later when the stock price suddenly makes an abrupt u-turn, bouncing hard and furious?

To prevent regrets from happening, one good strategy to use is the “Dollar Cost Averaging” strategy. This strategy involves equal investments at regular intervals to spread out the risk of buying shares too early or too late.

Dollar Cost Averaging

The Dollar Cost Averaging strategy works better in a bearish trend than a bullish one. Let me do some simple mathematical calculations to show you this.

You have got $60,000 to invest and you decided to split your total investments into $5000 each, to be invested once a month for one year. Assuming that the share price today is at $100 a share, falling or rising 3% a month in a bearish and bullish trend and eventually the share price hits $200 a share.

In a bearish trend, total profit when the share hits $200 a share will be $81,917.56.

Share Price Number of Shares Bought Number of Shares Owned Total Cost
$100.00 50 50 $5,000.00
$97.00 51 101 $9,947.00
$94.09 53 154 $14,933.77
$91.27 54 208 $19.862.20
$88.53 56 264 $24,819.84
$85.87 58 322 $29,800.50
$83.30 60 382 $34,798.33
$80.80 61 443 $39,727.03
$78.37 63 506 $44,664.61
$76.02 65 571 $49.606.11
$73.74 67 638 $54,546.86
$71.53 69 707 $59,482.44
Final Market Price @ $200 per Share $141,400.00
Total Profit $81,917.56 137.72%

In a bullish trend, the total profit when the share price hits $200 a share will be $42,146.00.

Share Price Number of Shares Bought Number of Shares Owned Total Cost
$100.00 50 50 $5,000.00
$103.00 48 98 $9,944.00
$106.09 47 145 $14,930.23
$109.27 45 190 $19.847.50
$112.55 44 234 $24,799.74
$115.93 43 277 $29.784.62
$119.41 41 318 $34,680.23
$122.99 40 358 $39,599.73
$126.68 39 397 $44,540.13
$130.48 38 435 $49,498.27
$134.39 37 472 $54,470.76
$138.42 36 508 $59,454.00
Final Market Price @ $200 per Share $101,600.00
Total Profit $42,146.00 70.89%

We can see that the total profits almost doubled when comparing investing averaging down as compared to investing averaging up.

The Bottom Line

While the rest are in fear of putting their money into the market, it is a good opportunity to be greedy and start your investment plans. Making regular investments now at the start of the new bearish trend may prove to be the best investments you would ever make. It may be painful at times to see the stock price keep falling but keep in mind, when the price hits the bottom, the only way forward is to go up.

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