I am going to start theming my posts. As previously discussed, I have a lot of interests and try to keep current on what’s happening in the world. None of you may give a hoot (don’t pollute) about what I may share, but if one person makes a more informed decision partly because of it (I love more information) then it’ll be worth it. YWWDREFK is a lot shorter than typing that big title out. I’ll be using that acronym to title these posts.
I’m not going to try and get too deep here, at least not initially. Nor will I try to interject my opinion unabashedly. So here it goes…
Have you heard of dollar cost averaging? The folks on financial TV like to throw the term around in regards to investment strategy. What it all boils down to is this: if you own 5 shares of a stock that you bought for $10, you are in that investment for an average of $10 per share (duh). Now the stock is worth $5. The proponents behind DCA will say it is a great time to buy.
This is how. Now you buy 5 more shares at this new $5 per share price. When added to your existing 5 shares, you now own 10 shares for a total cost to you of $75. This makes your DCA $7.50, or 25% LOWER. That is the selling point. You are now in your investment for a lower average cost. So you can “break even” if the stock only goes up by $2.50 now rather than $5.
But what is never mentioned is that this costs EXTRA money (duh). For some, it is a wise strategy, for others it is not. Something very very similar occurs in the Real Estate (RE) market.
You will keep hearing that home values are rising. I read reports of it everyday. If you pay attention to the details backing many of these statements, you will recognize a similarity to DCA, albeit the opposite.
Let’s say 5 homes sold last year, each one for $200,000. That would make the average price of each home sold $200,000 (duh). Now let’s say this year 5 more homes sell for $400,000 each. When you add them all together, you now have 10 homes sold for a combined $3,000,000, or an average price of $300,000 per homes.
Did prices go up? Well, on average they did. On DCA a home “increased” in value by 50%. You will hear this about many markets, without further explanation behind it, but we will delve into that in later posts. Some RE indices try to take care of this by focussing on “same home sales” rather than the example I provided above.
There is no perfect model though. Repeat sales could go like this…a flipper buys a home for $250,000 all cash. They don’t need to do anything to it other than flip it to somebody else who will be financing their purchase. They received a discount due to paying all cash. They also expect to make money when they sell it, and they do in only 1 month for $300,000. Did home values just increase by 20% in a single month? With that model, they did. What this model has a hard time with is applying increases in price over time and the impetus behind the increase (annual inflation premium, cash discounts, etc.).
Until next week…you can make any piece of information support any side of the claim…













