Dollar-Cost Averaging, Again

Harry S, who first learned of Priceline from us: ‘I went into Priceline, bid $84 on a 4-star, and got Sofitel in Beverly Hills. I called Sofitel, just to see and was quoted $329/night as a special!’

☞ Just be sure not to use Priceline if you might have to change or cancel your trip – the rooms are nonrefundable. And hotel rooms are the only one of the things they sell I can vouch for. Have never tried any of the others.

Quanta: ‘Dick Davis, Item 31, Dollar Cost Averaging made no sense to me: << If the market is unpredictable, a dollar-cost averaging approach makes a lot of sense>> … and then he says << For example, if you invested $500 every month in the S&P 500 Index during the 5 years, 1997 through 2001 when prices went way up and then came way down, your gain at the end of that 5 years would have been negligible.>> So what’s the point?’

☞ Ah, but if prices had gone way down and then come back up, instead of the reverse, your gains would have been substantial. Over time, if you buy more shares when prices are low and fewer shares when they are high, you will come out ahead.

Do the math with a hypothetical stock and you’ll see it. Buy $1,000 a year of a stock that starts at $10 a share, goes down $2 a year for three years and then back up $2 a year for three years so ends at $10. Have you broken even? No. Because $1,000 bought you more shares when it was lower, you wind up with a big profit. You invested $7,000 in this example – buying shares at $10, $8, $6, $4, $6, $8, and $10 a share – and wind up with 1032 shares of stock, or $10,320 worth once it’s back up to $10.

Of course, not all stocks that go down for three years do come back. But barring something truly catastrophic, ‘the market’ as a whole will. So this strategy with a broad index fund is awfully sensible if you have a truly long time horizon. Eat right, walk lots, and wear your seat belts.

Coming Soon: Citibank Branch 007