Dollar Cost Averaging This Recession
Can you call the bottom to the Dow or S&P? I know I can't. Of course the bottom is the best place to buy, but if you're not sure about exactly when it will occur, dollar cost averaging can be your ally. I believe this might be a good time to start accumulating shares of industrials, and other companies that have been beaten down, and if you think stocks will go down over the near term, i.e. the next one to two years, or that they will be range bound, this can be a good way to buy.
Dollar cost averaging means spending a fixed sum at regular intervals over time, for example buying $500 per month for company X's stock over three years. Your return on any investment is dictated by the price at which you buy, so a low basis creates a defensible position.
However, if you are in a market that is generally rising, you would of course fare better if you took the lump sum and invested it sooner rather than later. However, if you believe, as I do, that the Dow will go down further (and who really knows for sure) then averaging can be a better way to buy shares.
There are several brokerage firms that provide a service through which you can buy a fixed amount of stock every month, including fractional shares. Some companies will pay all the broker's fees as an incentive to buy their stock, and some of these are excellent companies. If the companies don't pay the fees, the monthly charges can substantially diminish your returns. Be sure to check the prospectus of the companies you are interested in.
Brokerage firms that allow you to buy stocks this way are listed below along with links to their sites:
Mellon Investor Service Direct
Wells Fargo Shareowner Services
In addition to domestic stocks, you can buy many foreign stocks this way if they are listed on the NYSE, Amex or NASDAQ. The key is to find the right combination of a company that pays or minimizes the ongoing brokerage fees and a company that you would invest in regardless if you were able to buy this way.
And, there are a few companies which will sell shares to you directly. One in particular is Proctor and Gamble (PG). You can get information at investor relations on their site: P&G Investor Relations
Disclosure: The author owns shares in Proctor and Gamble (PG).
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