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  • Dollar Cost Averaging Still Works. 0 comments
    Feb 19, 2014 4:27 PM | about stocks: FCEL, GE, GRPN, ARNA, DDD

    Dollar Cost Averaging still works.

    I am no expert when it comes to stocks but still buy and sell stocks regularly, for a simple reason - to make more than the interest that we get in bank fixed deposits and to beat inflation. We all want to do that but are afraid to take risk by investing in stock market. I am afraid too. But my returns are approximately 5% every month from stocks and that too without doing complex options trading and also not being getting accidentally lucky that a particular stock becomes sexy one day and goes up the roof. 3-5% per month equates to over 30-50% per year. Now that is a handsome return for someone like me who is not professionally educated in stocks. This is much better than some of my mutual fund investments. I know there are many people in this market who get a return of 100-4000% but they do it full time and are expert at what they are doing and no doubt they are taking much more risk than I am. I do not understand options even though I am trying to learn them now and might leverage this concept with options as well sometime in near future.

    What is my current strategy?

    I use buyandhold.com to do buy and sell transactions for stocks and ETF's. Even though I do not believe in buy and hold strategy except for few handful stocks I use this site to lower my commission expenses and to minimize my risk. I normally trade only in 10-11 stocks. The stocks that I buy and sell do not matter for the purpose of this article. What matters is how I am able to generate 3-5% return every month or sometimes in a week. Why do I use buyandhold.com? BuyandHold.com allows you to do unlimited buy and sell transaction for a small monthly membership. This reduces my transaction cost substantially. It gives you 3 windows in a day to do your transactions. I buy stocks every day and sometime same stock 3 times a day. For the sake of simplicity I will take that I am investing $1000 per day per stock in 5 different stocks over a period of a week @ 12:30 PM daily. At the end of the week I will sell all the stocks and see my returns.

    I can illustrate this with an example. The numbers mentioned are over a week in February 2014. Share price is at 12:30 PM and five day window is one week period.

      Share price # of shares Invested amount      
      Total units FinalSale Avg cost
    FCEL 1.465 682.5939 1000      
    1.51 662.2517 1000      
    1.62 617.284 1000      
    1.59 628.9308 1000      
    1.67 598.8024 1000 3189.86 5327.071 1.571
    GE 25.28 39.55696 1000      
    25.4 39.37008 1000      
    25.2 39.68254 1000      
    25.68 38.94081 1000      
    25.74 38.85004 1000 196.40 5055.347 25.46
    DDD 67.97 14.71237 1000      
    65.52 15.26252 1000      
    69.26 14.43835 1000      
    73.45 13.6147 1000      
    77.58 12.88992 1000 70.92 5501.808 70.756
    ARNA 6.67 149.925 1000      
    6.82 146.6276 1000      
    6.86 145.7726 1000      
    7.04 142.0455 1000      
    6.99 143.0615 1000 727.43 5084.751 6.876
    GRPN 10.42 95.96929 1000      
    10.62 94.16196 1000      
    10.4 96.15385 1000      
    10.55 94.78673 1000      
    10.49 95.32888 1000 476.4007091 4997.443 10.496
          25000   25966.42  
            %ROI 3.87%  

    As you can see that total money I invested in this week is $25,000 and total selling price for all my investments was $25,966.42, which gives me a return of 3.87% in a week. This method can easily be replicated for a variety of stocks and for whatever duration one wants. Sometimes, on the day I am selling, a particular stock does not perform well and I take a decision whether or not I want to sell that. Bottom line I sell if my stock value is up 5%. It can happen in a week or it can happen in few weeks. But till that 5% threshold is reached I do not sell. I keep buying in small increments. For most additional few 2000-3000 dollars per month by minimal risk is a lot of money and can be achieved by this disciplined approach.

    Dollar Cost Averaging is a very old proven methodology but requires patience and a disciplined approach to stocks. But anyone can do it. You can use buyandhold.com or any brokers to do that but commissions have a negative impact on earnings. If I use my Scottrade account to do these transactions then I will have to deduct 7*30 = 210 from my net, which brings my weekly return to 3% which is also not bad.

    The stocks I am showing in this example are from my portfolio and I am not recommending any of these stocks though would be glad if you buy it. Please do you own research on what stocks to buy? I like these companies and will keep on doing buy and sell on these stocks in next near future as well.

    Disclosure: I am long FCEL, GE, DDD, GRPN, ARNA.

    Additional disclosure: The stocks I am showing in this example are from my portfolio and I am not recommending any of these stocks though would be glad if you buy it. Please do you own research on what stocks to buy? I like these companies and will keep on doing buy and sell on these stocks in next near future as well.

    Stocks: FCEL, GE, GRPN, ARNA, DDD
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