Investor Trading

DOLLAR COST AVERAGING
As mentioned before, the purchase of common stocks is very different from the purchase
of bonds or preferred stocks, since the two last represent an attempt to produce a steady income with a considerable margin of safety. The plan of investment diversification, previously discussed in another chapter, provided for some investment in common stocks because these are best for long term growth. It is true that some common stocks have paid dividends for decades; it is equally true that some have averaged relatively low returns, while others have paid nothing at all. Common stocks are rated as least attractive in regard to income safety, which means the investor’s expectation of receiving exactly the same number of dollars as he invested if he eventually sells his common stock. However, that is but one side of the story; the other refers to the fact that common stocks as a whole have advanced surely and steadily over the years simply because the business of the country has grown steadily and has continued to be more productive and more profitable; this basic trend shows no signs of abatement, although there may, from time to time, be occasional dips in the prices, earnings, and dividends of common stocks, which usually follow the temporary fluctuations in general business conditions.
The average investor of modest means would like to share in this; at the same time, he wishes to receive some income; consequently, he may decide to buy what are good “defensive” equities, such as the public utilities; on the other hand, he may wish to participate in the continued growth of the nation’s business and so may be willing to forgo some of his return in the expectation of having gains in his invested capital. We will suppose that he has made up his mind to buy the stock of the XYZ Company, but hesitates because he does not want to be in the position of buying at too high a price; he is also aware that if he buys at a low enough price and holds the stock for some time, he may eventually be able to show a satisfactory profit. Some do this by use of an investment formula which they follow religiously, but all such formulae are not foolproof. Mr. Citizen must make a cautious approach; he cannot be “in and out of the market,” because he cannot afford it. The device known as “dollar cost averaging” is employed by many, especially those who make use of the Monthly Investment Plan (MIP)  sponsored by the member firms of the New York Stock Exchange. As shown previously, it is very simple. A certain fixed dollar amount is specified, with which regular purchases are made, buying as many full shares as this amount will obtain. This is done over a period of time. Its best feature is the fact that if the investor has spotted a good sound stock, he will find that the fluctuations of the market are of little concern to him, because he buys more shares when the price is low and fewer shares when it is high; consequently, the average cost is brought down to a point lower than the average price.