During my university days, a few friends and I were doing contra trading out of fun. Contra trading involves buying and selling the same shares without paying for them. But after a transaction, investors are given three days – known as the contra period – to transfer the cash to the brokerage as payment for the shares. Basically we were trying to profit from significant swings in the share prices within the contra period.
My most memorable contra trade was the one on Chartered Semiconductor. For the older generation, you would have heard of this company before. I was placing a bet that its share price would drop, and hence short sold it, hoping to buy it later at a lower price. Unfortunately, things did not turn out as expected and I had to buy its shares after the contra period. It was approximately $5 per share then, and I had to buy one lot which cost me slightly more than $5,000.
I could have sold it after that if the share price had gone up. However, this time the price did not go up but went down instead, and it kept going down. When it reached about $3, my mother advised me to buy more of its shares to average down my cost. So I pumped in about another $6000 to buy 2 more lots. To my dismay, the downward trend continued until it reached about $1. Again, my mother advised me to buy more. I bought 3 lots at about $3,000. In total, I had bought 6 lots and invested more than $14,000 on Chartered Semiconductor. Despite the fact that its price was going down, I kept on buying because Chartered Semiconductor Manufacturing was the world’s third largest dedicated independent semiconductor foundry, and it was wholly owned by ST Engineering. In those days, companies like these were deemed to never fail. My greatest nightmare came a few years later, when the company was acquired. My losses were realised and I remember receiving a cheque of about $800 only. I had lost almost $14,000!
So while I was dollar cost averaging, never did I know that I was actually catching a falling knife! So does dollar cost averaging work all the time? Definitely not in this case. While Unit Trusts may get delisted/terminated, investors can transfer their funds into another Unit Trust without suffering any losses (unless there is a significant drop in price in the new Unit Trust). Also, during a bull market, dollar cost averaging will not work better than a lump sum investment because you would regularly be buying at higher prices. In such a situation, a lump sum investment works best.
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Disclaimer: All information are for informational purposes only and should not be relied upon as financial advice.