Dollar Cost Averaging This Recession

Dollar cost averaging can be your ally during a recession. 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 $300 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. 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 it can be better to buy a bit at a time. It's impossible to predict the bottom. 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. But others don't pay the fees and these can substantially diminish your returns. Brokerage firms that allow you to buy stocks this way and some excellent companies that will pay the fees for you are listed after the jump.

• Computershare
• Mellon Investor Service Direct
• Wells Fargo Shareowner Services
• JP Morgan ADR.com

You can buy many foreign stocks this way as well if they are listed on the NYSE, Amex or NASDAQ. Some of the companies which pay the fees the above providers charge (so there is no cost to the investor) are PepsiCo (PEP), Exxon Mobil (XOM), Becton and Dickinson and Co. (BDX).

There are many other companies that will do this as well, but you have 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. Be sure to look at the company plan prospectus. I have seen fees charged every month for direct debit or for reinvesting dividends. I think you might want to avoid these companies, unless the prospects are so great that they outweigh any fees.

There are a few companies which will sell share to you directly. One in particular is Proctor and Gamble (PG).

Disclosure: Author holds positions in the above-mentioned securities

Comments

[Malkiel]

It would be tax form madness to do it this way for anything other than some kind of tax-deferred retirement account.

For a taxable account, consider a simpler strategy; let a chunk of cash build up in the account and use your broker's trading software to set up a buy triggered by reaching your preferred low price-point. You may not reach that price point, but if you get close enough to suit you you can step in and execute the buy manually. Buying a chunk at a reasonable discount once a year beats dealing with tax complexity for multiple share purchases (actually, the later selling is the problem).

[User 168345]

I would think the companies track your basis, to make their service simple to use.

[DividendGrowthInvestor]

My analysis shows that the losses that you forgo in a bear market are far less than the gains that you miss in a bull market using DCAV.

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