A “Must Know” Strategy for Investing in Volatile Markets

This week, Safe Haven Investor editor Kent Lucas looks at “dollar cost averaging,” a tried and true approach to investing in these volatile times.

For the past few weeks, there has been a lot of discussion about the stock market’s direction and what could be the extent of this correction we’re apparently in the middle of.
The correction has been officially identified by many market professionals. Last week I too discussed it, in light of the market’s (rich) valuation and historical perspective. I then mentioned in my “What to do?” concluding thoughts the concept of “taking advantage of lower prices to pick up solid long-term holdings...”
Well, that phrase could use further elaboration. I gave you some broad words of solid wisdom, and today I will try to explain in more detail.
There is a well-known tactic that long-term investors use for building their positions over time. I’m sure some of you are at least familiar with what is known as “Dollar Cost Averaging” or “DCA.” (I really hope most of you are already incorporating dollar cost averaging into your stock purchasing methodology.) In fact, through direct investment plans, IRAs and 401(k) type programs, you may be doing DCA and might not know it. And with less visibility and the markets going up and down so much, DCA makes more sense now for most investing efforts.
Let’s look a little closer at some Safe Haven Investor examples to better convey the importance of (and strategy behind) dollar cost averaging.

DCA Defined

Dollar Cost Averaging is a sound buying (and selling) strategy that works well when stocks prices are moving up and down.
Let’s say you were a long-term reader of Safe Haven Investor and back in November of 2008, you took our advice and added HudBay Minerals (HBM:TSX) to your portfolio.
HudBay Minerals is a Canadian integrated mining company that has been a great addition to the Safe Haven portfolio, up 113% since we recommended it on Nov. 7, 2008. But I don’t want to talk about that awesome return – I want to talk about DCA.
On that date the HBM price was $6 a share. You could have made a lump-sum or “one time” purchase, say of $3,000 worth, for 500 shares.
That’s great, but sometimes you gradually want to add to your position. Perhaps you don’t have all the money at once, or you want to do it monthly or quarterly. Deducting a set dollar amount out of your monthly paycheck to purchase shares is a common example. That, simply, is dollar cost averaging.
With dollar cost averaging, you add to (or reduce, if the case may be) a position periodically, effectively “averaging” your total dollar cost. This works great if you’re buying a stock and the price tends to be lower than your “one time” price

This is kind of important. If you have a comfortable and ongoing strategy of dollar cost averaging, than you pay less attention to dips in the stocks you are buying. As long as you are still comfortable with the investment rationale behind buying the stock, and nothing material has changed with the company and its fundamentals, then dollar cost averaging will let you buy with confidence. As Peter Lynch suggests, “The key to making money in stocks is not to get scared out of them.”

On the other hand, if the stock starts rising, then your average cost could be higher. But in this environment, if that happened to be the case, I might not mind paying a higher price when there is a near-term risk of the stock dropping down lower. If the stock does go higher, you are buying fewer shares at that higher price with the same dollar amount.
Also, if there is a chance your investment (temporarily) turns sour, at least you will be entering at a lower and lower base, allowing the opportunity for positive returns sooner.

The HudBay Example

Back to HudBay for a moment. In the chart below, using $3,000, we compare a lump-sum purchase at $6/share vs. dollar cost averaging for six months since the Nov. 7 recommendation.

With Dollar Cost Averaging, our “average” price would have been $5.17, allowing us to own 528.6 shares, compared to a lump-sum purchase on Nov. 7, 2008, where the “average” price was $6, giving us 500 shares.
Having an average price of $5.17 vs. $6 is a major difference! Actually, by dollar cost averaging, you would have been up 16% already, which over the long run and with larger dollar amounts would have a meaningful impact on your portfolio. And in HudBay’s case, this is before the stock doubled and made its run to the low teens.
So, now you know about Dollar Cost Averaging – which in this market could serve you well.

FOREX: Ringgit Closes Easier Against Dollar

KUALA LUMPUR, Feb 2 (Bernama) -- The ringgit closed easier against the U.S. dollar as market players retreated following a speculation that the central bank may raise interest rate earlier than expected, a dealer said.

As at 5 pm, the local currency declined to 3.4170/4200 against the greenback compared to last Friday's close of 3.4060/4110.

The local market which was closed on Monday for the Federal Territory Day holiday, saw the local currency also declining due to a stronger US dollar which has been gaining strength from positive signs of recovery in the US economy.

Recently, Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz was reported saying that there was a need to look at normalising interest rates due to other risks of financial imbalances.

She said should interest rates go too low and (remain so) too long, it could result in people moving outside the formal financial system to enhance their returns on savings and result in taking higher risks without realising it and this may result in problems later on.

The ringgit, meanwhile was higher against other major currencies.

It appreciated to 2.4195/4240 against the Singapore dollar from 2.4256/4319 last Friday and rose against the Japanese yen to 3.7694/7753 from 3.7748/7820 previously.

The ringgit was also higher versus the Euro to 4.7561/7613 from last Friday's 4.7602/7679 and gained against the British pound to 5.4388/4453 from 5.5078/5173 previously

FOREX-Euro up vs dlr as Greek vs German spreads narrow

* Euro rises but gains limited on Greece concerns * Aussie falls as RBA surprises, holds rates at 3.75 pct
* Market awaits White House adviser Volcker's testimony (Recasts, updates prices, adds comment, changes dateline, previous LONDON)
NEW YORK, Feb 2 (Reuters) - The euro hung on to gains against the dollar as the New York session opened on Tuesday, supported by a narrowing in Greek government bond yield spreads over German debt as investors awaited the European Commission's reaction to Greece's plan to fix its finances.
Greek Prime Minister George Papandreou said the level of Greek and euro zone bond spreads was completely unjustified, keeping up the rhetoric against speculators he blames for targeting his country. For more see [ID:nATH005160] and [ID:nATH005161].
The comments came ahead of the publication on Wednesday of EU recommendations to Athens on its austerity plan.
The Australian dollar fell after the Reserve Bank of Australia surprised investors by leaving its benchmark interest rate unchanged at 3.75 percent. There had been almost universal consensus the central bank would hike to 4 percent. [ID:nRBA]
"Bond market fears over Greece reached a high last Thursday and have since fallen back," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto. "This hints that the market is stabilizing and that much of the bad news is now priced in."
In early New York trade, the euro EUR= had pared earlier losses to trade 0.1 percent higher on the day at $1.3938, recovering from a seven-month low hit on Monday.
Greek 10-year yield spreads over Bunds were at 351 basis points, off a session low of 327. Last week, the spread expanded beyond 400 basis points, its widest since Greece adopted the euro in 2001.
The slide in confidence in Greece triggered selling in its government bonds, blowing out its yield spread with German bond.
For a graphic on the euro/dollar exchange rate and Greek spreads, click here
But euro gains were capped by concern that deficits in other euro zone countries, such as Portugal, would keep investors wary of taking big positions in the euro zone common currency.
"Sentiment remains fragile despite the strong U.S. GDP data last week and the Greek situation is still in the background, making investors cautious," said Paul Robson, currency strategist at RBS.
Underlining the possibility that fiscal woes may extend beyond Greece, European Central Bank Governing Council member Vitor Constancio said on Tuesday Portugal's economy required "significant adjustments". [ID:nLSB002240]
The dollar index, a calculated measure of the dollar's performance against six currencies, slipped 0.1 percent to 79.162 .DXY, but was still near a six-month high hit on Monday. The dollar was 0.1 percent lower against the yen at 90.52 yen JPY=.
AUSSIE DOWN
The Australian dollar AUD= fell to a low of US$0.8780 before paring losses to trade at US$0.8825, down 1 percent in the global session after the RBA decision.
The Australian dollar held above $0.8735, which analysts said was a key level to watch, given that a fall below that level would take the currency to its lowest in four months.
Some analysts said a general improvement in risk sentiment, albeit slight, would limit Aussie losses in the near term while they expected the currency to remain in demand, particularly given the RBA left possibility open for future rate hikes.
"Investors may look to use the dip ... as a buying opportunity given that broader 'risk' sentiment appears to be improving and positioning is not stretched," Citi analysts said in a note.
"This suggests there may only be limited scope for stop-loss-driven selling and position unwinding to drive AUD lower. On balance, we believe it is unwarranted to shift away from a positive view on AUD."
Risk sentiment will be under scrutiny later when White House adviser Paul Volcker appears before the Senate Banking Committee to defend the administration's proposal to limit risk-trading by banks, which spooked investors and triggered a sell-off in equities when it was unveiled last month.
According to testimony obtained by Reuters, Volcker will urge Congress to curb the risks taken by large banks to help prevent them from being treated as "too big to fail"

US President Barack Obama unveils 2011 budget plans

President Obama: "It is a budget that reflects the serious challenges"

US President Barack Obama has announced a $3.8tn (£2.4tn) budget plan for 2011, which includes increased spending for job creation, but cuts in other areas.

He also forecast the US deficit would rise to a record $1.56tn this year.
He scrapped plans to send astronauts back to the Moon and will seek to save $250bn by capping a range of domestic spending programmes for three years.
Congress must approve the budget for the financial year starting on 1 October for it to take effect.
Mr Obama blamed the huge deficit on the decisions of President George W Bush, previous Congresses and his administration's moves to prevent an economic collapse.

ANALYSIS Kevin Connolly, BBC News, Washington Barack Obama, buffeted by recent election defeats for his Democratic Party, has a keen political sense of the image he wants to portray on the economy - that of a president forced by circumstance into enlarging America's already huge budget deficit in the short-term while promising in the medium-term to reduce it. So his $3.8tn budget includes more money for education and scientific research and more for defence programmes. But it also looks forward to eliminating waste and freezing many other domestic programmes. His critics will accuse him of old-fashioned taxing and spending. His electoral future may well depend on his ability to bring the deficit under control.

He said that in normal circumstances he would have worked to cut the deficit immediately, but expensive steps were need to help the economy.
Mr Obama urged lawmakers to follow his lead on reducing "waste in programmes I care about" and avoid "grandstanding".
He added: "We cannot continue to spend as if deficits do not matter."
The budget includes about $100bn of tax incentives designed to lower double-digit unemployment, including inducements for companies to hire workers.
This will be partially offset by higher taxes on wealthy Americans earning more than $250,000 a year.
The budget also includes more money for education, scientific research and defence programmes.
'Quagmire' of debt
But Mr Obama also plans an overall three-year freeze on the portion of government spending that excludes commitments on welfare benefits, healthcare for the elderly, defence and homeland security.

The president's proposed Nasa budget begins the death march for the future of US human space flight Republican Senator Richard Shelby Obama kills Moon landing plan

And he cancelled the Constellation programme launched by his predecessor that envisaged putting astronauts on the Moon's surface by 2020.
In his federal budget request, Mr Obama described the project as "over budget, behind schedule, and lacking in innovation", adding that it was draining resources from other Nasa activities.
Under Mr Obama's budget plans, Nasa would get funding to encourage private companies to build, launch and operate their own spacecraft, which could be used to carry astronauts to the International Space Station.
Republican Senator Richard Shelby condemned the move. "The president's proposed Nasa budget begins the death march for the future of US human space flight," he said.
Republicans also attacked Mr Obama's proposed tax increases and said the large projected deficits showed he had failed to get government spending under control.
Senator Judd Gregg, the top Republican on the Senate Budget Committee, said the US was sinking into a "quagmire" of debt and that Mr Obama's stimulus plan had failed to create jobs.
"These circumstances call for a bold, game-changing budget that will turn things around, put in place a plan to restrain spending, reduce the debt and tackle the big entitlement programmes that are growing out of control," he said.
"Instead, the president has sent us more of the same."

Exxon Mobil profits fall 23% in fourth quarter

The results were ahead of analysts' forecasts

US oil giant Exxon Mobil has reported a 23% drop in profits, but the result was better than many analysts had expected.

Exxon made a net profit of $6.05bn (£3.8bn) in the fourth quarter of 2009, compared with the $7.82bn it made in the same period in 2008.
Weak demand for fuel in the global economic slowdown hurt the company's refining business.
In the whole of 2009, Exxon made a profit of £19.28bn, less than half of what it made in 2008.
Shares in Exxon Mobil rose 1.9% to $65.67 when trading began in New York.
Last week, Chevron reported a 37% drop in quarterly profit. Fellow oil giants BP and Royal Dutch Shell also have figures out later this week.
Better production
Exxon said exploration and capital spending rose by 4% in 2009.
"Our financial strength provided us with the foundation to continue investing in new energy supplies to help meet global energy demand and to fuel economic growth," said Exxon chairman Rex Tillerson.
"Capital and exploration spending was $27.1bn in 2009, another record year, and in line with our longer-term plan."
Oil and gas production increased nearly 2% in the fourth quarter, which was better than some analysts had forecast, while revenues rose 6% to $89.84bn.
"The two things I like to see drive an earnings beat are better production and better margins," said Phil Weiss, oil analyst at Argus Research. "They certainly got the production."

Russia's economy contracts 7.9% in 2009

2009 was a difficult year for the Russian economy

The Russian economy shrank 7.9% in 2009 compared with 2008, the Federal Statistics Service has announced.

This was less bad than the government's 8.5% forecast, but it was still the biggest annual fall in 15 years.
The oil exports that previously underpinned Russia's growth have been hit by a sharp drop in energy prices.
The preliminary official statistics show that the decline also sharply affected construction, manufacturing, restaurants and hotels.
However, 2010 may see a return to growth. Manufacturing data indicated a month of expansion in January, with the country's purchasing managers' index rising to 50.8 from the previous month's reading of 48.8.
Kingsmill Bond, strategist at Troika Bank, said he expected to see the Russian economy expand in 2010, since indicators such as retail sales had been growing since last summer.
The Federal Statistics Service did not give a quarterly breakdown of the latest GDP figure.

Ryanair shrinks losses and raises profits forecast

Ryanair's chief, Michael O'Leary, says customers' behaviour is changing

Budget airline Ryanair has raised its full-year profit forecast as passenger numbers continue to rise.

It said it expected full-year net profits of about 275m euros, as it reported a 10.9m-euro ($15.3m; £9.5m) loss in the October-December period.
The loss was much narrower than the 101.5m-euro deficit recorded in the same period in 2008.
Ryanair said the result had been helped by a 37% fall in fuel costs, which had offset a 12% cut in fares.
But although passenger numbers increased by 14%, spending on Ryanair's extras - such as paying for checking in baggage - rose by just 6%.

See Ryanair's share price

Ryanair chief executive Michael O'Leary said the slower growth in what the airline calls "ancillaries" was due to "changes in consumer behaviour".
Extra charges
The carrier's new profit forecast compares with its previous estimate of "the lower end of the range of 220m to 300m euros," Ryanair said.
However, despite the higher forecast, the airline warned that market conditions remained difficult.
Even so, the Irish-based airline said it would continue to pick up market share from rivals, and expected to do particularly well in Italy, Scandinavia, Spain and the UK.
The company has been criticised for charging for a raft of extras on top of its basic ticket price.

Last month, the Office of Fair Trading Budget accused Ryanair of being "puerile and childish" over its payment policy, with customers only avoiding fees when they pay for tickets online if they use a Mastercard prepaid card.
In an interview with the BBC, Ryanair chief operating officer Michael Cawley said such criticism was not a concern to the company when it was expanding so fast.
He said it was the fastest-growing airline in Europe - and one of only two in the region that were growing at all.
Mr Cawley added that the fact passenger numbers had risen in the third quarter - and it was expecting another seven million more customers to fly with it in its next full year - spoke for itself.

WORLD FOREX: Dollar Slips As Global Data Stokes Risk-Taking

NEW YORK (Dow Jones)--The dollar slipped from six-month highs Monday as evidence of a global economic recovery drove investors to higher-yielding currencies.
"The data are helping" improve investor sentiment, said Matthew Strauss, currency strategist at RBC Capital Markets in Toronto. The recent selloff in the euro and other higher-yielding assets may have been "a bit excessive, and you see some bargain hunters coming back into the market."
Traders were looking ahead to Friday's U.S. non-farm payrolls report for evidence of the strength of an economic rebound, noting that long-term demand for dollars is likely to be strong as the U.S. economy recovers.
Late Monday, the euro was at $1.3930, up from $1.3866 late Friday, according to EBS via CQG. The dollar was at Y90.65, up from Y90.29, while the euro was at Y126.29, up from Y125.22. The U.K. pound was at $1.5962, down from $1.6004. The dollar was at CHF1.0561, down from CHF1.0606.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 79.194, down from 79.452. The index overnight hit a fresh six-month high of 79.534.
As a result, Deutsche Bank's PowerShares US Dollar Index Bearish (UDN) exchange-traded fund was up 0.41% from late Friday, while its PowerShares US Dollar Index Bullish (UUP) was down 0.47%. The two exchange-traded funds are based on Deutsche Bank currency futures indexes, whose composition mirrors that of ICE's Dollar Index.
The euro's gain on the dollar granted it a reprieve from recent concerns over Greek debt. Analysts warned the reprieve could be short-lived, especially if fiscal issues in the euro zone's periphery infect the core of the monetary union.
For now, growth-sensitive currencies, such as the euro, the commodity-backed Australian and New Zealand dollars and emerging-market currencies, were gaining on the back of the rosy global data, which stoked risk appetite.
To see the euro's moves against the dollar, please see: http://dowjoneswebservices.com/chart/view/3369
A January index of U.S. manufacturing released Monday hit its highest level since August 2004, further entrenching the idea that the global economy is clawing its way out of a hole.
The U.S. factory sector booked its best performance in more than five years in January, amid a rebound in hiring and rising price pressures, the Institute for Supply Management said. Its index of manufacturing activity moved to 58.4 in January, the best reading since August 2004, from 54.9 in December and 53.7 in November. Readings over 50 indicate growth and describe the breadth, but not the magnitude, of the change. Economists had expected the index to come in at 55.3.
The strong U.S. data came on top of positive overnight data from the euro zone, where a stronger-than-expected manufacturing sector purchasing managers' index helped the euro stage an earlier rebound. The index rose at its fastest pace in two years in January, according to a Markit Economics report.
Even with the euro's bounce, it might not last for long if the sovereign-debt concerns over Greece, Portugal and other euro-zone nations again rear their heads, analysts warned.
At the moment, the spreads to insure against default on Greek sovereign bonds have tightened, indicating a slight improvement in investor sentiment toward the problems facing Greece, said Jacob Oubina, currency strategist at Forex.com in Bedminster, N.J.
"They're still not out of the woods," he said. "Far from it." In fact, concerns could spread to Spain, analysts said, which could again put the euro under pressure.
Meanwhile, the U.K. pound failed to benefit from the strongest U.K. manufacturing data reported in more than 15 years, as uncertain investors sold off sterling over uncertainty about whether the Bank of England would end the bond-buying program--known as quantitative easing--it enacted to stimulate the economy.
Investors sold off the pound as they looked toward Thursday's Bank of England meeting, when the Monetary Policy Committee will announce whether its bond-buying program will continue.
Lloyds TSB analysts in London said the BOE finds itself in a "Catch 22" position, with the U.K. pound likely to be hit no matter whether the committee decides to end the bond-buying program or to continue it.
Ending the program could leave investors wondering whether an economic rebound can gain traction without stimulus; and continuing the program might lead investors to conclude a recovery is too weak to take hold without the help of stimulus.
The pound had recovered some of its earlier loses, but still was down nearly 0.2% by afternoon trading in New York.