Dollar Cost Averaging..... a very very important concept for continued growth/profit from your investments!

In short, dollar cost averaging is an investment technique used to reduce market risk through the regular purchase of securities at predetermined intervals and set amounts. Many successful investors already practice this without realizing it. Many others could save themselves a lot of time, effort, and money by beginning a plan.

Dollar Cost Averaging: What is It?
Instead of investing assets all together in a lump sum, the investor works their way into a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over several years, providing insulation against changes in market price.

So how do you set up your own dollar cost averaging plan?
In order to begin a dollar cost averaging plan, you must do a couple things:

1. Decide exactly how much money you can invest each month or period.
2. Make certain that you are financially capable of keeping the amount consistent; otherwise the plan will not be as effective.
3. Select an investment that you want to hold for the long term, preferably five to ten years or longer.
4. At regular intervals (weekly, monthly or quarterly works best), invest that money into the investment you’ve chosen. If your broker offers it, set up an automatic withdrawal plan so the process becomes automated.

For example: You own a mutual fund and invest $100/month into it. If the mutual fund goes up over the long term, which we assume and hope will happen, your average price per share will steadily go up. On the other hand, if the mutual fund declines for a time period of over one month, your price per share will decline.

Here are the numbers. Let's say the mutual fund share price is $50/share to start.
Purchase 1 - $100, 2 shares at $50 each
Purchase 2 - $100, 1.96 shares at $51 each (can only buy 1.96 shares b/c price has appreciated)
Purchase 3 - $100, 1.92 shares at $52 each
Purchase 4 - $100, 1.88 shares at $53 each

In this case, you would now have $400 invested in this mutual fund and you would own just under 8 shares (7.76 shares to be exact). The average price paid would be $51.50. Therefore if the mutual fund goes below that you are at a loss but if it is above that then you have gains.

Dollar cost averaging works even better when a fund decreases in value after you buy it. For instance, you buy 1000 shares of a stock at $50. It goes down to $25 and you buy another 1000 shares. At that point, you would own 2000 shares at $37.50. This helps b/c then the stock doesn't have to make it all the way back to $50 for you to break even, it only has to get to $37.50. Obviously it is useful if you believe in the prospects of a stock. If you bought a stock that has been downgraded or isn't attractive anymore, then you may just want to cut your loses.

Godspeed.

Insider buying and selling......what does it tell us?

Insider Trading

Insider buying and selling is a very, very powerful tool in helping to determine whether a company is a good investment or not. Insiders are the executives, directors, and 10% owners of public companies. They know more about the health of the company than the average or everyday investor because they run it on a day to day basis. Studies have shown that companies that have significant insider buying have beaten the market time after time. This is no accident. Insider trading tends to lead the market by anywhere from six months to a year because of the knowledge that the executives have of their business model and how well the outlook is for the future. Insiders of a corporation obviously know more about the individual company they work for, the industry/sector that that company is in, and its competitors. This information not only helps them determine how the company is doing but also how much the company's stock should be valued at.

On the other hand, insider selling has not been shown to lead to a decline in the stock price because an insider may sell stock for myriad reasons: a child going to college, a new home purchase, or any life event.

Taking this into consideration, how is it that we can profit from this? Simple. Keep up with the news and look at investment vehicles in the market that take advantage of this information. Remember: every time and insider buys or sells, there is a process that they must follow and that involves following many SEC regulations that are eventually publicized so that each one of us can find out who is doing what. One way to capitalize is to keep your eyes open for headlines in the news that say a public company's executive is purchasing a block of shares or exercising options. This could be a sign that you need to look into the transaction to get more info. Another way to benefit is to invest in a company, or a group of them, that have insider buying. NFO is a managed ETF, an exchange-traded fund which is similar to a mutual fund, that holds companies whose high level executives and directors are buying company stock. There are also proprietary products that many of the brokerage houses, Smith Barney, Merrill, and Morgan Stanley, design to allow their clients to invest in these companies.

I would suggest 'googling' insider buying/selling and seeing if you can come up with a list of companies to look into.

Here is a preliminary list:
CABOT OIL & GAS CORP
MOSAIC CO
ST JOE CO
NUCOR CORP
COMCAST CORPORATION CLASS A
LABORATORY CORP OF AMERICA
MASSEY ENERGY CO.
OM GROUP INC.
ONEOK INC.
KAISER ALUMINUM

All it takes is a little research and turning over a couple of rocks to find the right company and the right time to invest.

Comments are welcomed!

Feel free to make any comments that would help make the blog more useful, i.e. any topics you are interested in or any other info I have neglected.

Thanks.

Is there an end in sight for gold and oil prices?

The above charts show oil and gold prices over the past year. Pretty similar increase; both going through the roof. A couple questions that come to mind are, Why are both oil and gold increasing at the same time? and Why would someone want to own gold? I'll answer these below.

1- Why are oil and gold prices rising together?

Oil, Inflation and Gold

Although the prices of gold and oil don't exactly mirror one another, there is no question that oil prices do affect gold prices. If oil prices rise or fall sharply, investors can expect a corresponding reaction in gold prices, often with a lag. There have been three major upward moves in the price of gold, one of which we are currently experiencing. The first occurred in the early '70s when oil prices tripled. During the same period, gold prices rose 2.5x. The second major price move occurred later that decade, when oil prices doubled. Over the same period, gold prices rose another 2.5x. The third period has been during the last year. As the charts above show, one year ago (5/1/07) oil and gold prices were about $65/barrel and $675/ounce respectively. Today, oil is trading at just over $119/barrel and gold is just under $900/ounce.

2- Why Own Gold?

There are six primary reasons why investors own gold:

1. As a hedge against inflation. Gold is renowned as a hedge against inflation. The most consistent factor determining the price of gold has been inflation - as inflation goes up, the price of gold goes up along with it. Since World War II, the years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%. Coincidence? I think not. Today, a number of factors are conspiring to create the perfect inflationary storm: stimulative monetary policy, a declining dollar, a spike in oil prices, a mammoth trade deficit, and America’s status as the world’s biggest debtor. This has caused commodity prices to reach all time highs across the board.
2. As a hedge against a declining dollar. Gold is bought and sold in U.S. dollars, so any decline in the value of the dollar causes the price of gold to rise. The U.S. dollar is the world's reserve currency i.e. it is the medium for international transactions, the principal store of value for savings, the currency in which the worth of commodities and equities are calculated, and the currency used as reserves by the world's central banks.
3. As a safe haven in times of geopolitical and financial market instability. There are myriad problems occurring around the world, any of which could erupt with little warning. Gold has often been called a 'crisis commodity' because it tends to outperform other investments during periods of world tensions. The very same factors that cause other investments to suffer cause the price of gold to rise. A bad economy can sink poorly run banks. Bad banks can sink an entire economy. Both of which we are currently seeing, along with gold soaring. As banking crises occur, the public begins to distrust paper assets/money and turns to gold for a safe haven. When all else fails, governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always risen the most when confidence in government is at its lowest.
4. As a commodity, based on gold’s supply and demand. Demand is outpacing supply across the board. Gold and other precious metals production is declining. It is very difficult to open new mines because it takes a long time, making it hard to address the supply issue quickly. There is growing demand in China and India, the largest gold-consuming nations.
5. As a store of value. One major reason investors look to gold as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in a market collapse. It actually becomes a go-to investment during problematic markets. Historically, gold has proved to be an effective preserver of wealth for investors.
6. As a portfolio diversifier. The most effective way to diversify your portfolio and protect the wealth created in the stock and bond markets is to invest in assets that are negatively correlated with those markets. Gold is the ideal diversifier for a stock portfolio, simply because it is among the most negatively correlated assets to stocks. Although the price of gold can be volatile in the short-term, gold has maintained its value over the long-term, serving as a hedge against the purchasing power of paper money. For these reasons, exposure to gold in one form or another, is essential to having a truly diversified portfolio.

With that said, there are several ways to invest in gold. You can buy gold mining company stocks (ABX, AUY, GOLD, NEW are a few), mutual funds of these stocks (INIVX), closed end funds that mirror the gold price (GLD), or gold bricks or coins itself. If you think that oil will continue to increase you may want to look at the US oil fund (USO).