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I’m currently reading a book by Leslie Masonson titled All About Market Timing (yeah I’ve been digging into technical analysis for several months now). In one of the page on her book (is it a he or a she?) she stated:

…, never use dollar-cost averaging in a bear market, since it puts you on the wrong side of the trade when the market is tanking.

Sure, I agree with what she’s saying but there’s something that buggers me… How do you know if it’s a bear or bull market in the beginning of a trend? Most people will think the start of a bear market just as another “correction” that is overdue.

In my humble opinion, dollar-cost averaging is a great way for a stock in a minor corrections. Since several weeks ago I’ve been watching PGAS closely. I had hoped that the change of boards of director will give some impact to the price. Well it did, not positively though… the price tanked a couple of points throughout the week. I initially bought at 11,000 (since I think it already reached the bottom and there’s a strong “fundamental” resistant there — will get there on another post) and the stock still dwindling down until 10,000. A moment before it reached that number, I averaged down my account at 10,200 and 10,250 which brought my dollar-cost average to about 10,700. Mind you, my initial position at 11,000 is significantly bigger than those in the lower channel I bought after.

Since that, the stock gained a significant amount to its previous price of 11,000.

What am I trying to tell? A good stock, no matter how bearish or bullish the market is, is a good stock. And only on those stock that you can average down without loosing a significant amount of your portfolio. In fact, averaging down does indeed decreasing your dollar-cost average and limiting your portfolio risk (to a certain amount of course).

So does dollar-cost average invalid? Certainly not. You just have to be careful on when to use it.