One of my favorite stocks, Ariba (Nasdaq: ARBA) suffered a downturn and I wanted to take advantage of the situation. After reaching a high on March 8 of this year, it started to plunge. By March 27 it had lost more than a quarter of its value. I looked at the reasons for the drop and reconsidered the company. I felt that this was still an excellent long-term hold and the time was right for another purchase.
I examined my finances to see if there was some way that I could afford to buy more of the company. The problem was that I had recently purchased a house and you know how expensive it can be to get the telephone hooked up, the electricity turned on, etc. I decided that I simply couldn't afford to buy more at the time.
The stock continued its slide and by April 4 it was worth 40% less than the early March high. I looked at the news again, noted that the bottom had fallen out of the other Nasdaq companies, and I decided to add more onto my stake.
Again, I checked through my finances for extra money. However, I had recently purchased a house and we were looking at a security system -- and you know how expensive those can be.
On April 24 I looked again at the price and it had now dropped more than 60% from the March high. This is a company with a tremendous future that was getting carried downstream with the rest of the other Nasdaq companies. I knew that it was absolutely time to pool my resources and make another purchase.
My finest comb, however, could not find funds that were not accounted for, as I had bought this house, you see, and, well, you get the picture.
I had called it -- the bottom -- three times, and so far, two of those were wrong (the jury is still out on the third call).
As I had called the bottom wrong two of the three times, it got me thinking about the wisdom of setting up a fee-laden Pseudo-Drip in cases where the company offers a fee-free Drip. The most commonly mentioned reason for doing this is to take control of the timing of the purchases. Paying a fee to be able to work the timing aspect is certainly something at which I would not be successful.
It is no problem to watch a price fall and call the current condition a dip. However, it is a much different matter to know the point at which the falling action should actually trigger an additional purchase. If one could do so on a consistent basis, then it would make sense to set things up to take advantage of those opportunities.
Beginning a Pseudo-Drip to make one's purchases this way can be a costly affair. The fee for a single purchase should be of little concern. The problem, however, shows itself when one does this on a regular basis. Consider a $2.99 monthly fee invested over 20 years where it returns 11%. That $717.60, when invested as such, would result in $2,588.26. Suddenly we are talking about real money.
However, I am not willing to discount the use of a Pseudo-Drip for this purpose completely. Because BuyandHold.com (www.buyandhold.com) and Sharebuilder (www.sharebuilder.com) do not charge the customer if a minimum number of purchases are not made during the course of a year, it would make sense to open an account to use them to make those additional purchases.
For instance, if one had made a purchase of Intel through the regular Drip and the price then dropped to a level at which one wished to make an additional purchase, the Pseudo-Drip account could do this at a cost much less than a typical discount broker. There's certainly nothing wrong with holding the shares of a company in two different places.
But I would like, at some time, to return to the problem of determining the trigger point for an additional purchase. If you have an unemotional, mechanical means for doing this, I would invite you to share your idea with us on the Drip Investing boards linked below.