So IV, the thing I don't get about DCA, is how do you choose what portion of your capital you commit to each purchase? If you felt "more" uncertain, would you spend 12% at each leg down, as opposed to 20%?
I dont have a hard and fast rule. Basically it boils down to
(a) upside vs downside potential/risk
the greater the varience the happier i am to continue to dollar average.
(b) size of the underlying company
as a general rule of thumb, large caps have less volatility than small caps. So my dollar averaging positions will be smaller for large caps than for small caps.
(c) volatility of the share
the greater the volatility of a share, the wider the dollar average bands.
(d) quality of the company.
the lower the quality of the underlying company, the wider the dollar average bands. (note here: this applies not just to the quality of the company, but also for my degree of certainty that i am right, the less certain, the higher the bands need to be)
(in no specific order)
As a general rule of thumb, once i have made up my mind to acquire a company i prefer to acquire an intial stake equal to roughly 2% of my portfolio. So i will dollar average both upwards and downwards within a relatively tight range (say 5%) to acquire that 2%. The exception to this is
(a) zero LVR stock. A zero LVR stock must have at least 30% with preferably 50% upside potential, because it chews my capital.
(b) a high ylding stock thats needed to balance income from the portfolio. I will settle on a high ylding stock at less than 2% of the portfolio if its a 'safe' high yielder.
Then the most
IMPORTANT RULE
i have a margin loan, so i cant just stick my head in the sand. I cant be a 'natural' investor. One of the
fundamental trading rules has to apply to myself:
the market can remain illogical longer than i can remain solvant
Therefore i have to keep an eye on my margin positions. This is a key determinant as to whether i dollar average.
Personally, I think when there's so much fear around like this, it is arguably a better strategy to DCA in only after the fundies firm up, and there's support from the technicals.
the problem with technicals, is there are technicals and then there are technicals. I started dollar averaging in 2008 right through the downturn.
When the market swung up, i made most of my money in March/April 2009.
Why? the fear factor was greatest just before this point in time, hence the discount to intrinsic value was the greatest BEFORE that initial swing.
Technicals wouldnt have helped me at that point in time (everything was pointing to dead cat bounces).
When you refer to the fundies, consider:
(a) fundies are definately better than in late 2008. This was truely a worrying time, really worrying, really really worrying.
(b) the forward indicators
(c) that companies have adapted to those worrying times of 2008, well some companies anyway (and these are the ones i am interested in).
Personally, I reckon it is a bit too early to be jumping in. If you appreciate Robert Shiller's views on animal spirits like me, it is easy to reason there's still a modicum of fear in the belly to be expressed....
whats this?
if you mean animal spirits in the overall market place, i can tell you even before the latest downturn, animal spirits werent running strong.
Retail investors have not committed to the market, the average 'joe bloe' is not convinced anymore that you can make squillions from the share market.
In fact the only areas that i see animal spirits are in
(a) residential property in australia
(b) resources.
(c) gold
Dont confuse returns with animal spirits. There are so many factors at play here, a good part of the returns from the
'2009 bottom' have been:
(a) retracement of market shorts
(b) hedge funds and the carry trade.
(c) stupidly low share prices that any blind harry could have seen if he was looking at the underlying companies.
