OK, that could be a little strong, but if you are a die hard dollar cost averager(DCA), then this might be worthwhile.* Actually, someone asked me to post this months ago, so I'm getting the 2005 bills paid.
I'm going to detail what could be called a "modified DCA plan," which attempts to out perform standard DCA and lump sum investing by supercharging the buy low/ sell high process.* With this plan you invest a steady amount every month like DCA, but the formula requires you to buy more shares when the price is low and less when it is high.
This is not my invention and many variations exist.* This is a version I tweaked in the early 80's when I was buying lots of Magellan which was the hottest fund going thanks to Peter Lynch and a couple of his followers.* My 5 year results show I increased my total take by about 19% plus interest of an unknown amount.* I dumped my Magellan years ago, but the 5 year accumulation was the cornerstone of my nest egg.
I plan to employ this concept again in 2006 using several Fido funds.
Here's the plan:
Step 1.* Plunk down the required $2500 most FIDO funds require to open.
Step 2.* Decide what your core investment will be each month.* Set the amount about $100 above the minimum required by your fund for additional investment.
For many Fido funds that is $250 so I'm going with $350 monthly.
Step 3.* It is best, but not required, to have a MM fund with the same family to keep the transfers painless and to earn a bit of interest on unused funds.
So far we have established our account, determined our monthly commitment and opened a MM account.
Step 4.* We now begin monthly deposits to the MM of $350 (the core), after which we shift some of the core to the mutual fund, but before we do that we must do another calculation as shown in Step 5.
Step 5. We determine our base investment by finding .75 of the $350 core.* That comes to $ 262 rounded. Important to remember that $262 is the base and it will always be the base.
Step 6. So now before adding to our fund we figure our average cost per share of the previous shares we have purchased.* We've been keeping track of our puchases so the math is easy. Yes? So we initially invested $2500 which bought us 100 shares at $25 each.* Now 30 days later the price has climbed to $26 per share. I'm using rounded numbers and you should also.* So we divide todays price ($26) into our cost per share ($25).* That gives us .96. Remember this number.
Step 7. Remembering that the purpose of this drill is to buy more low and less high we now multiply our base by .96 which is $262 X .96 = $252.00.* * Invest that amount right now. This buys us 9.7 new shares.* The rest of your monthly core stays in the MM fund earning interest That amount is $98 as in 350 - 252=$98.* Because the price per share went up we spent less than our $262* base figure. (buy more low/ less high)
Step 8. Bummer, but the next month your fund fell to $22 per share.* So now once again we figure our cost per share.* Invested* $2500 plus $252 for $2752, and we own 109.7 shares.* Looks like average cost of $25.08.* Again, divide the average cost by the current price. 25 divided by 22 = 1.14.
Step 8. Now we multipy our base(262) by 1.14 for $298. Keep that $298 figure in mind and do one more calculation. Using our 1.14 figure, we drop the first number leaving .14. We will use this figure to create an additional "power investment" this month. Why?* Because we are taking advantage of the lower cost per share.* So we find our MM balance (for this account) which is now $150 if you've been keeping track. We take .14 of this balance which is $21. This becomes our power boost and we add it to the previously computed $298 which yields $319. Invest that amount in your fund quickly. You'll be buying 14.5 shares this month compared with 9.7 the previous month when share prices were higher.
Step 9.* Repeat the above for several years. The longer you invest like this the more you will notice the difference when compared to DCA.
I've done a couple of backtests and seen a few done by others.* Each involved 5 years and as you would expect the share price was all over the place during the 5 years.* In each test DCA was beaten by at least 12%.* I am currently back testing this method using the Fido Energy Service Fund.
Needless to say, over the course of the 5 years you must watch the performance of your fund.* If it turns into a frog, nothing can save you.* If you are opening a new fund as opposed to adding to an existing one, please employ a little timing so you don't enter at the top of the market.* I also used this system to provide a disciplined sell signal, but that's another chapter.
Hopefully my math errors are nonexistent. Good luck