“Price-Based” Investment Entry

This is an interesting little technique you may find useful.  Here’s how it works….

Let’s again assume you have a total of $100k to invest.  First, you  determine how often you want to make a purchase of the investment.  We’ll assume it’s every two months.  Rather than buying the same dollar amount each time, you weight your purchase based on whether the purchase price is higher or lower than when you made your last purchase.

You begin by purchasing a certain amount of the investment – we’ll say $20,000.  Two months later, you determine of the price of the investment is higher or lower than when you made your first purchase.  If it’s higher, you only buy half as much ($10,000 in this example).  If it’s lower, you buy 50% more ($30,000 in this example).

This price-based method of entering the investment proves most beneficial when the managed investment has only short “drawdown” periods. Drawdowns are the times of negative performance.  When performance is down, you’re buying 50% more of the investment.  That can help to reduce the average price of all your purchases over time.