Traditional investing logic goes: good investment opportunities always exist, and at times the market can undervalue or overvalue a given stock. Many traders and analysts will give buy or sell recommendations on a given stock based on its intrinsic value and how the market currently values the equity portion of a business.
That said, some of the best investors of all time have followed a very simple formula for entering new positions:
(1) look for an attractive entry point in a company with a great brand and long-term position in a given market; and (2) continue buying, so long as the intrinsic value of the company remains higher than the given market price.
The long-term effects of dollar-cost-averaging have been analyzed at length, and I won’t bore you with repeating what many others have already said. I will say, however, that studies have shown that continuing to invest a fixed amount of money in good companies in intervals continuously over time should produce better results on average than simply “throwing a dart at a board” and buying a stock with a large amount of money at one time. Investors reduce risk associated with periodic downturns in a stock, and continue to get increased exposure to the stock’s upside should the underlying business’ equity valuation continue to increase.
The key is finding good companies to invest in over long periods of time: those that will not only survive cyclical downturns but thrive compared to its peers due to some competitive advantage.
The search for yield remains in today’s market brimming with high valuations – thoughts of a downturn have discouraged some investors from jumping in. Dollar-cost-averaging is just the technique to mitigate some of these downside worries, while providing great upside portfolio potential.
