Dollar-Cost Averaging Strategies Don’t Make Sense with Diversified Holdings

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By Jacob Maslow

buying stocksI was flipping through some finance channels on cable recently, and I couldn’t help but be flabbergasted by one piece of “advice” from a “financial expert.” She was saying that in this current market, it doesn’t make sense to do dollar-cost averaging with one stock; you have to do dollar-cost averaging with diversified holdings. I had to almost literally pick my jaw off the floor. Either this person doesn’t know what she’s talking about, or she is being manipulative and deceptive. Either way, it’s not good.

Dollar-cost averaging is all about buying one stock at a fairly high price, waiting for it to crash, then buying a lot more at that lower level. You then wait some more for it to hit a bottom, and then you buy a lot at that much lower price. The whole point of dollar-cost averaging is to get your average cost so low that it doesn’t take much upward movement for the stock for you to break-even.

Dollar-cost averaging is all about reducing your break-even level. This only works if you deal with one stock. That’s why the whole concept of using dollar-cost averaging strategies on a very diverse investment portfolio really blew my mind. It seemed like it came out of left field. The secret to dollar-cost averaging is sticking to one stock.

Another key secret to dollar-cost averaging is to buy a weakened stock. This is one aspect of dollar-cost averaging strategy that many people don’t get. Most investors think that dollar-cost averaging is really just about reducing your break-even costs. While, for the most part, this is true, there is also a strategic benefit you can get from buying weakened stocks and using dollar-cost averaging. Weakened stocks with strong fundamentals have a high tendency of experiencing dynamic growth in the future. The best part is you scooped up these stocks when they were quite cheap.

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