Financial Freedom SG

Do you think you can sell at the top or near it and be able to spot the time to buy into the market near the bottom?

But what I have read and seen so far tells me that one cannot consistently tell when to buy and sell.

Consider these quotes attributed to top investors:

"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two" Warren Buffet

"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market" Benjamin Graham

If this doesn't convince you, maybe the list of stocks picks that failed for Fortune, Forbes, Business week will tell you something. Check out How Magazines Led Investors Towards Ruin.

If they cannot tell you what stock to buy, do you think the so called experts can tell you when to buy or sell?

No one can consistently tell you when is a good time to buy or sell. Hence, the time you stay invested matters more than timing.

No one can consistently tell you which are the good stocks to pick. Hence, a basket of stocks is your surety against putting it all into one stock or one fund or one star investor (just ask the ex-millionaires who invested with Bernie Madoff, Enron employees or people who put all their monies into Citibank). Diversify your investments.

In a bear market that we are now in, a dollar cost averaging strategy is a good way to maximise returns.

If you look at the table, at the down trend, you will see that you are able to buy 284 shares at an average cost of $8.79. This means that you have a small profit actually because the average price bought is $8.85.

The disadvantages of dollar cost averaging becomes evident when compared to investing one lump sum right at the start at the cost of $10 per share. If you had invested right at the start the whole sum of $2500 you will have 250 shares which beats the 'Up' market and the 'mixed ' market.

Intuitively, you would expect that the earlier you invest, the more your money is being compounded. At the same time, if you have $2500 to invest, you are probably better off investing the whole sum now rather than to have to wait till a later time as shown, UNLESS it is a bear market.

The dollar cost averaging method was what I used during the 2000-2002 bear market where I managed to get shares or units of funds at a lower cost on average which i recouped with a tidy sum in 2007 just before the present crisis hit. At the moment, the proceeds from this previous exercise is sitting in the Central Provident Fund to act as a buffer for my housing loan in case I should lose my job.

I am currently putting aside $300 monthly buying into two separate funds of which one is an index fund. Every month, if the stocks market tanks, I console myself by knowing that I am buying more units which will translate to a higher profit when the market recovers. When the market recovers you can balance your portfolio buy selling a portion while continuing to dollar average. It is disciplined approached to investing that allows you to accumulate different funds.

I have read an interesting book titled "Value Averaging" by Michael Edelson which improves on dollar averaging and I will continue to think about that approach and read more before embarking on it. Anyone read any good articles about Value Averaging?

If you are still not convinced of its benefits read this Dollar-Cost Averaging: The bear market solution investment strategy.

So dollar cost averaging is useful when the market is trending down and when you do not know the best time to buy, just like all the supposed experts out there.

If you have read all the way till here, congratulations. The image above has nothing to do with dollar cost averaging. I just thought that it sums up the choices and decisions that we make have a material influence on our future.