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buying units when they've dropped in price: a good idea?

Discussion in 'Managed Funds & Index Funds' started by transit, 19th Sep, 2006.

  1. transit

    transit Well-Known Member

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    Hi all, i recently sent off a cheque for $10k to buy units in the CFS global resources fund. This is one of the most popular funds at the moment because of it's great returns in the past few years due to the booming sector.

    I paid $1.3809 per unit on 6/9/06 and today they are worth $1.2838 ($9,296.84).

    Yeah i guess i jumped in at the wrong time considering that resource stocks are down :(

    To ease the pain and make myself better, i'm thinking of purchasing more units (maybe $5k worth) to help average my buy in price.

    What are people's thoughts on this strategy?

    I've heard with shares it's generally not a good idea to buy a stock that's falling in price but i figured that there's less risk with a MF due to the collection of stocks in it.

    Or should i just sit on my hands and hold on. I realise that funds need a 5yr+ outlook but i'm a bit pissed considering i used the money from a LOC.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The answer depends very much on your philosophy towards investing.

    A trader might tell you to "never try and catch a falling knife", and indeed to set yourself some "stop losses" and get out when the investment falls below your trigger value.

    An investor might tell you to buy more when the price is low.

    So which is right ?

    Personally I think it depends on the risk involved.

    If you are trading stocks or investing in funds that are highly speculative and have the potential to go down significantly, then I think it is a bad idea to be buying more as they go down. You need to manage your risk.

    If you are investing for the long term into carefully selected blue chip stocks (like NavraInvest do), or into funds which have their own risk management mechanisms in place, then I say yes ... when the price is down - that is a good time to buy more.

    My current personal strategy is to invest in a range of funds that I believe will do very well over the next 3-5 years or so ... I set limits as to how much I invest in each.

    I invest a set amount each week (LVR permitting), and choose which fund to add to based on which fund's unit price has dropped the most (or indeed, risen the least) since the beginning of the last quarter. Once a fund reaches its maximum allocation, it no longer makes the short list, and I direct my additional investments elsewhere.

    If the value of a fund drops far enough below my maximum allocation, I'll buy more to top it up - the logic being that I think it's still a sound fund to be in despite any short term volatility, and I'll take the opportunity to increase my holdings while it's going cheap.
     
    Last edited: 20th Sep, 2006
  3. BladeCA

    BladeCA Member

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    I have just opened an account in the same fund at the start of the month although it was only with 2k but am doing a reg savings plan into it from my salary. Its only $250 a month not alot i know but i have money going to other funds aswell. I will continue my regular investment for some time even if the fund dips for a while. Means i get more units when the price is down.

    I also recently bought some shares in ABC learning ($7500 worth) these have taken quite a dive since then. Am i annoyed.. yep sure am cause I want to use that money for a deposite on a block of land. But at the time i bought the shares i knew they could fall in price, that is the risk i was taking in investing my money in something other than a bank account.

    If you are concerned that you have had your capital decrease by $700 you may need to consider whether your risk profile is correct and that you can tollerate potentially losing money out of your LOC. Your investments need to suit your risk tolerance/profile.

    My opinion would be to get some more units while they are low if you can afford to have the money in the fund. To me this is a good fund that has shown constant growth. Its managers should have risk management measures in place.
     
  4. Tropo

    Tropo Well-Known Member

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    "To ease the pain and make myself better, i'm thinking of purchasing more units (maybe $5k worth) to help average my buy in price.

    What are people's thoughts on this strategy?

    I've heard with shares it's generally not a good idea to buy a stock that's falling in price but i figured that there's less risk with a MF due to the collection of stocks in it."


    Transit,

    You are correct. Averaging down is the worst idea you can get !!
    If some shares are cheap today - the next week the same shares might be even cheaper !!.
    I do not think that MF may carry less risk due to the collection of stocks - because MF is as much vulnerable to the risk as private investor with a big portfolio.
    In 1973 a lot of investors put their money in BHP, and after 10 years they luckily broke even (some people can wait 10 years to get own money back).
    A lot of investors put their money in Telstra 6 years ago (buying more shares on the way down using average down strategy).
    We all know how happy these investors are today.
    :cool:
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Hehe ... how did I know Tropo was going to say that :D

    Like I said - there are different mentalities involved here. Tropo is a trader, and has a particular mindset and approach to things. I'm not saying that is necessarily wrong - just that I personally don't agree that every situation requires that approach - indeed, I think it can actually be damaging to your long term performance.

    But that's just a personal opinion and is not necessarily any more or less correct than Tropo's, and you'll have to make up your own mind.
     
  6. Tropo

    Tropo Well-Known Member

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    "and you'll have to make up your own mind.

    Spot on Captain !!!!!!!!!!! :D
     
  7. shake-the-disease

    shake-the-disease Well-Known Member

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    My personal opinion is that I agree with Tropo on the danger of averaging down. Unfortunately I learnt this through my own experience, never again!!

    "An investment is a trade gone wrong" <-- just thought I'd throw that in
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    So shake - what is your net asset value ? Do you own any assets, or do you only trade them ? What is your financial freedom strategy ? What is your retirement strategy ?

    Don't answer those questions (unless you really want to). I just think that quoting trading "axioms" is not terribly insightful in a discussion about investing.

    Trading is a valid way of actively producing income, but it doesn't build wealth in itself (unless your definition of wealth is cash in the bank).

    I challenge the traders on the forum to explain to us their wealth creation strategy - and their plans for financial freedom and "retirement" (if that is what your goal is).
     
  9. hiflo

    hiflo Well-Known Member

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    I have done the exact same thing as Blade and Transit. I bought the units in managed funds when the unit prices were high at the beginning of September 2006, before the resource sector fall.

    As at current I have invested about $7000 in five different funds and all are below purchase value except for one, which I put the least amount of money, $500.00 for safety. It is now worth about $510.

    The other four funds were geared funds or international funds, meaning that I would have a big risk and I am paying for that risk now. But on the other hand, I can make get bigger returns if the fund performs well because of leverage and exchange rate factors working in my favour.

    I am taking this risk because this is half the deposit money for an investment property that I am looking for earnestly at the moment. If it increases greatly I could put more into the offset (waiting for better investment vehicle), if it decreases it can remain in there until I need the money.

    To balance the risk I have some put almost the same amount in principal guaranteed investment provided by Citibank, where if I am lucky I can get simple 13% interest pa at the end of investment (max 3 years, min 1 year), which works out to be around 12.2% compound interest pa. I would get net return after tax of 8.54%, which is tad more than the interest on home loans at the moment. So I am happy with this decision too.

    I also thought about getting a margin loan to for the funds for increased returns but decided against it because I wanted to get some "feel" of the fund first. I was impressed with the figure I saw on paper (3 year, 5 year returns), but I just wasn't sure how my particular lot of units were going to perform. Also later, I found that depending on the souce the 3 year and 5 year returns were different and realised that they were returns measured from certain months like july 2001 july 2006, march 2001 to marck 2006 etc and one particular fund showed 38% pa in one research and 75% in the other- so which figure do I go by !!!

    In short, the answer to your question Transit, I would buy more if I had my own money when the price of the units dropped. I would be weary to invest borrowed funds for your losses will be magnified if the prices dropped lower. If you are confident that the value of underlying shares will jump up greatly in the short term, then investing with borrowed funds will be fine because it will magnify your return and recover the losses you made with the earlier purcahse.

    Just my 2 cents.
     
  10. Nigel Ward

    Nigel Ward Team InvestEd

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    My 2.2 cents worth is to ask yourself a couple of questions.

    Has the reason/s I bought these shares/funds changed? For example does BladeCA no longer believe investing in the proverbial 800lb gorilla in the childcare sector is a good idea?

    Is the current price dip a normal fluctuation that should be ignored given a 3-5 year investing timeframe? No-one can answer those questions for you but you.
     
  11. Tropo

    Tropo Well-Known Member

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    "I challenge the traders on the forum to explain to us their wealth creation strategy - and their plans for financial freedom and "retirement" (if that is what your goal is)."
    __________________
    Sim'


    Sim,

    What makes you think that traders have got different strategy in wealth creation to investors :eek:
    Basically, good traders have got ability to generate more cash in the same period of time than investors, but this is not necessarily the most important element in the wealth creation.
    After all, it's not important how much you are making BUT what you are doing with your money (eg. acquire more IPs etc...).
    :p
     
  12. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Tropo - do you care to share with us what you do with your money ?
     
  13. Tropo

    Tropo Well-Known Member

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    Nothing special Sim.
    Just like most of us buying more IPs, MFs or interesting antiques.
    Apart from above I spend some $$ on my wife and myself of course.:D
    If I have some spare money I am travelling overseas.
    As you see, nothing spectacular. And that is the way I like it.:p
     
  14. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    So do you hold your IPs and MFs long term, or do you trade them ?
     
  15. Tropo

    Tropo Well-Known Member

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    IPs long term + MF long term if performance during bear market is reasonable.
    Currently I trade FX only.
    :cool:
     
  16. shake-the-disease

    shake-the-disease Well-Known Member

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    Only if they go wrong :p

    Sorry, couldn't resist :)
     
    Last edited by a moderator: 20th Sep, 2006
  17. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    So what criteria would you use to increase your investment in IPs or MFs ? ie. at what point is the right time to buy ?
     
  18. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    So what is your strategy then ?
     
  19. Tropo

    Tropo Well-Known Member

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    Right time to buy IPs or MFs is always different for some people.
    Generally if market turns bullish (according to my analysis) it will generate buying opportunities.
    :cool:
     
  20. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    So how would you analyse a managed fund to determine when the market has turned "bullish" and it is the right time to buy ?