FORGET ABOUT DOLLAR-COST AVERAGING IN A BEAR MARKET

  Dollar-cost averaging is another popular investing strategy bandied
about in the canyons of Wall Street. Catherine Voss Sanders wrote an
article entitled “The Plight of the Fickle Investor” in the Morningstar
Investor (December 1997), and she stated: “Because emotions and
hype can get in the way of smart investing, systematic dollar-cost
averaging is a sound strategy. …[I]n most cases, the dollar-cost averager
is going to beat the willy-nilly investor.”
To the contrary, 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. It is the traders who are right when they say never average
down. Take the advice of Richard Russell (Dow Theory Letters, 1984):
Averaging down in a bear market is tantamount to taking a seat on
the down escalator at Macy’s.
Imagine buying Corning at 113 (split adjusted) on September
1, 2000, and buying more shares each month as it tanked, so that
you could lower your cost basis. Corning hit a low of $1.10 on
October 8, 2002. Guess what? How in the world can you ever
recoup that kind of a loss?
Dollar-cost averaging in a bear market is a strategy for dummies,
not for intelligent investors. That goes for stocks as well as mutual
funds. There is no guarantee that your stocks and mutual funds will
return to their March 2000 highs any time soon, and throwing good
money into a declining fund makes no sense to me. Remember that
hundreds of funds go out of existence or are merged into other funds
simply because of their poor investment performance.