However, sunny88, a bottom-biased form of dollar-cost-averaging can be used effectively like a shotgun to shoot at an anticipated bottoming of stock or commodity. And I certainly DO NOT agree that we never have even a rough idea of where the bottom we be reached on stock or commodity.
Let me provide an example. Consider OIL.
I had a gut instinct a couple months ago that oil would drop to roughly $30/bbl. Now I was going on instinct. However, there were also some very experienced oil analysts were also expressing that opinion, so that helped my confidence.
Now as it turns out I made good money on that trade, but I wouldn’t have made one thin dime had I waited for $30/bbl before buying my double-long crude oil ETF’s. $30/bbl never came.
Instead, I used a bottom-searching method of dollar cost averaging, where I started buying significantly BEFORE values reached my anticipated bottoming price. When oil first slid to $37/bbl earlier in Dec, I started my dollar-cost-averaging on the crude oil ETF’s, like “UCO.”
But then oil dipped to $33/bbl, and I added to my position in the crude oil ETF’s. On either side of Christmas they really hit bottom and I was buying.
“UCO” then went from $10/share at Christmas, up to $18/share on Jan06, for a net appreciation of about 80% in one week. It was the attack on Gaza by Israel that really sent oil back up to $50.
DISCLOSURE: I made two mistakes on that trade that limited my profit:
1) I only bet about 3% of portfolio. I should have gone with maybe 5% or 10% once oil reached $33 (extremely oversold).
2) I ended up selling “UCO” at about $13, which was WAY to early. My actual average net gain was about 15%. I should have used a trailing stop loss order and let UCO run all the way up to $18.50 and stop out at about 17.50.
Anyway, sometimes it works to use a “shotgun” approach to hitting the bottom. When our investment target starts to get near our anticipated bottoming price, we start our bottom-seeking dollar-cost-averaging, and we INCREASE our buys as the investment price nears our target, to lower our average share price.
Of course, one must use PRUDENT RISK CONTROL when using any method involving increasing our bets when an investment is moving further out-of-the-money. You don’t want to lose all your money in case when you are WRONG on where the bottom is.
NOTE: I presently own no oil investments of any kind at the moment. I believe OIL will continue to go lower, oil futures curve will continue to flatten into lower prices. I’m now guessing $25/bbl,even $20/bbl within 2009 year.
When “UCO” gets to $9, and hopefully even $7, then I will be LOADING UP on both the double-long crude oil ETF’s and also the big oil stocks like XOM.
NOTE: nobody in their right mind would bet more than 5% or 10% of an entire portfolio on an extremely risky bet like a double-long or double-short crude oil ETF. I certainly do not wager more than 10% of my portfolio on such bets.
