Learn To Avoid Market Timing

Ideally, investors try to buy a stock when thethan if you had bought all the shares in the
price has reached a support level (a level at whichbeginning before the price skyrocketed. So, it is
the price is as low as it will go) and sell the stocknot always a winning strategy to spread your
when it hits a resistance level (a level at which thepurchases over a period of time.
price is as high as it will go). This is easier saidValue averaging, also known as dollar value
than done. Most investors end up missing out on aaveraging (DVA), is a technique of adding to an
continual rise by waiting for a stock to plummetinvestment portfolio to provide greater return
first, or sell way to early by underestimating howthan similar methods such as dollar cost averaging
high the price will go. In this article, we will focusand random investment. With the method,
on the two most popular strategies that you caninvestors contribute to their portfolios in such a
use to invest without having to worry aboutway that the portfolio balance increases by a set
market timing.amount, regardless of market fluctuations. As a
Dollar cost averaging (DCA) is an investingresult, in periods of market declines, the investor
technique intended to reduce exposure to riskcontributes more money, while in periods of
associated with making a single large purchase.market climbs, the investor contributes less.
According to this technique, shares of stock areHere is an example of DVA: I want to invest in
purchased in a specific amount on a specifiedYahoo using DVA. For the sake of argument, we
periodic basis (often monthly), regardless ofwill say that Yahoo is currently $10 per share. I
current performance. The theory is that this willdetermine that the value of the amount I am
lead to greater returns overall, since smallergoing to invest over the course of 1 year will rise,
numbers of shares will be bought when the coston average, $1,000 each quarter as I make
is high, while larger number of shares will beadditional investments. If I use DVA, I invest
bought while the cost is low.$1,000 to start. If, at the end of the first quarter,
An example of DCA would be as follows: If Ithe share price has risen to $15 per share, that
want to buy 1,200 shares of IBM stock usingmeans that the value of my investment is now
DCA, then I might decide to purchase 400 shares$1,500, which means I will only have to invest
of IBM per month over the course of the next$500 at the start of the second quarter in order
three months. Hypothetically, during month one,to bring the total amount of my investment for
the price of IBM may be $105 per share, andthe first and second quarter to $2,000. So, I am
then it might drop to $95 per share during monthinvesting less as the stock price increases.
two, and then rise to $100 during month three. IfIn the long run, dollar value averaging usually
I bought all 1,200 shares during month one, Iworks better than cost averaging because value
would have cost me $105 per share. But, byaveraging results in less money being invested as
spreading the purchase over a three monththe stock price goes up, whereas with cost
period, I managed to buy IBM at an average priceaveraging you continue to invest the same
of $100 per share.number of dollars regardless of the share price.
The primary drawback of using DCA is that youHowever, neither of these stragies are necessarily
may not be maximizing your overall return. Iffull-proof. Make sure you know something about
there is an indication that a certain stock isthe company you are going to invest in before
currently undervalued and might shoot up in price,deciding which strategy will best help you to avoid
you would actually make less money using DCAthe pitfalls of market timing.