Buying In Thirds – Slowly Building a Position

There is a philosophy in the investing world that states that an investor should not throw all his or her money at a stock they like at one time, but rather buy into a position over a certain period of time. The most common approach seems to by buying in thirds (i.e. buying a stock on three different occasions at 1/3 of your money each time.

Don’t confuse this with pure dollar cost averaging (DCA). DCA is more of an automatic, no thinking type of approach. Once you decide on an investment product you like, you set up an automatic payment schedule where each and every period (monthly, quarterly, etc) money is withdrawn from your account and invested in the investment. This is very common in mutual funds where it is very easy to implement. When an investor is buying individual stocks, then this is not as easy unless you use a service such as the Canadian Shareowner Association or Sharebuilder.com.

There are pros and cons of the 1/3rd approach. Pros are that it spreads your risk out over time and allows an investor to continue to buy a stock if it dips in the first few months after the initial purchase. The major con says that over time you will be better off if you invest the lump sum at once as any reduction in average cost is washed out over time. An investor needs to decide what fits best for them and what will allow them to sleep at night.

I have invested both ways. However, I prefer to select the stock I like after thorough research, and then make an initial purchase and wait to see what happens over the next few months to see if I can get in at a lower price. I still end up committing all my allocated funds to that stock, it just may take me a few months to do it. It is something I am comfortable doing and lets me validate my decision over time. It may not work for you, but that is your choice.