Dollar Cost Averaging Up – Buying into a stock’s strength to decrease your portfolio’s risk
Dollar Cost Averaging Up (DCA Up): To purchase shares of the same security at successively higher prices in order to achieve a larger position, at an average price that is lower than the current market value. If you initially buy a stock at $10 and reinvest at $10.50, your Dollar Cost Average is $10.25, “up” from $10.
Under the DCA Up strategy, one regularly reinvests in stronger stocks as they climb, as opposed to making the full investment at the initial purchase price.
While the major market indices are still yielding negative performances for the year, the Gorilla recommends using the relationship between strength and higher prices to increase the probability of a trade’s success. Since the majority of stocks will generally follow the market’s overall trend (3 out of 4), this very simple tool (DCA “Up”) may assist subscribers in reducing trade risk and preserving portfolio capital. The DCA “Up” strategy may require extra time and patience, but the payback is enormous when seeking certainty during NEUTRAL market environments.
The opposite of DCA Up is Dollar Cost Averaging Down, or what the Gorilla calls “throwing good money after bad.” This is the strategy of buying a stock after it drops below the purchase price, with the hopes that it will rebound. The Gorilla warns that this strategy can be quite dangerous, especially if your stock pulls back on heavier volume (the sign of damaging weakness). Just ask a stockholder of any company that has gone bankrupt! Why risk a bigger loss by adding to a position in a stock that could fall even further? Isn’t that similar to trying to catch a falling knife? The DCA Down trading approach encourages buying into weakness and “hoping” for a stock’s recovery in uncertain market environments, instead of buying in strength (with DCA Up)!
Average cost of four potential 100 share purchases: 22.38
Current stock price: 26.55
Current potential return: 19%
Although CBG has been a strong portfolio performer since late April, and stocks theoretically can rise forever, hindsight may be the only determinant of how many times you may dollar cost average “UP”. Therefore, dollar cost averaging “up” in excess may put your stock position at risk from profit taking; always update and raise stop areas, and realize gains or losses according to your individual risk parameters.
Average cost of four potential 100 share purchases: 36.31
Current stock price: 44.00
Current potential return: 21%
Average cost of three potential 100 share purchases: 56.08
Current stock price: 67.50
Current potential return: 20%
The Gorilla would now like to provide a few examples of stocks that were “confirmed,” and consequently failed due to poor market conditions. While the “Confirmation Day” concept has proven to be an imperative tool in the marketplace, nothing is infallible, and risk measures should always be respected. Even if hindsight may entice urgency to purchase stock, the next example will prove that patience may reimburse subscribers by avoiding larger losses with a complete stock position.
Cost of one potential 100 share purchase: 58.44
Stopped out level (raised after “Confirmation Day”): 53.50
Potential loss: 8.5%
The stock consolidated for over a month after “confirming” before falling sharply with the markets. This behavior is typical during NEUTRAL environments, and risk measures should be adjusted weekly to one individual risk parameters. By not Dollar Cost Averaging DOWN, potentially large losses can be avoided.
Cost of one potential 100 share purchase: 67.25
Stopped out level (raised after “Confirmation Day”): 64
Potential loss: 4.5%
Even though the market contains many exceptions, the Gorilla has noticed that DOLLAR COST AVERAGING “DOWN” is usually a dangerous endeavor that generally increases trade risk, while reducing portfolio capital. Although IBM has not been a GorillaPick for many years, look at what DCA “DOWN” would have resulted in with this EXCELLENT stock!
Average cost of three 100 share purchases: $91.25
Current stock price: 75.30
Current unrealized gain: -17%
Lastly, the Gorilla would like to now share a few examples of stocks in the current portfolio that may be presenting excellent opportunities to dollar cost average “UP.” These stocks have withstood any of the market’s latest decline, and are showing strength greater than the broad market averages.
In conclusion, during trend-less market environments (NEUTRAL), extreme volatility is generally a common characteristic with all stocks before any new trend can be established. But beware! This “posturing” is a product from the constant battle between the bullish and bearish speculators through the use of stocks or options. This is the exact reason the Gorilla constantly reminds subscribers about managing risk avoidance. Even a portfolio of well-diversified assets cannot escape all risk. So stick with the strongest GorillaPicks, assign an exit strategy to each and every trade, and always realize gains or losses according to YOUR individual risk parameters!