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Aug 29

Dollar Cost Averaging

Posted on August 29, 2011 at 12:00 AM by Shannon Stone


Is now the right time to invest in the stock market?  Should you wait until it goes up or down a little?  If you are not comfortable making these decisions, then Dollar Cost Averaging might be an investment strategy for you to consider.  It enables you to invest in equal increments over a period of time. 

Dollar Cost Averaging is the systematic investment of a fixed-dollar amount at regular time intervals.  Those intervals are usually every two weeks as people have money taken out of their paychecks to be automatically invested into their 401(k) or 403(b) retirement plans.  Other investors use this same strategy to have money withdrawn from their checking, savings or brokerage accounts to be invested in a Traditional IRA or a Roth IRA.

By contributing equal dollar amounts every month, you purchase bigger quantities of fund shares the lower the market drops.  So what you are actually doing is buying more and more shares at a cheaper price!  Then, when the market begins to rebound those shares go up and value and your account balance rises.

Additionally, that same dollar amount you are continuing to invest, now buys less shares each time than it did before because the market is higher now.  The result is that you don’t buy as many shares at the higher, more expensive price.

Instead of trying to “time” the highs and lows of the market, a daunting task for even the most professional of investors, you are investing the same amount of money at regular intervals, allowing you to take advantage of market fluctuations and volatility.  The phrase in the industry is, “It isn’t timing the market that works, it is time in the market that works!”

Again, over time you end up, as the chart below shows, with many more shares purchased at a lower price and many less shares purchased at a more expensive price.  One of the great benefits of Dollar Cost Averaging is that it actually turns the uncertainty of market volatility into an investor’s best friend!


Monthly Investment

Share Price

Shares Purchased



Avg. Cost per Share

Jan. $200

$10

20.0



$600/41.3 =

Feb. $200

$25

8.0





Mar. $200

$15

13.3



$14.53


Investing with a Dollar Cost Averaging strategy does not guarantee that an investor will make money.  It also cannot prevent losses in a prolonged bear market environment.  However, over time, using Dollar Cost Averaging can be a disciplined strategy which will reduce the average price per share that you pay to participate in the stock market.