Simple Investment Strategy: Dollar Cost Averaging

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Dollar Cost Averaging

What is Dollar Cost Averaging?

It is a technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of share price. The investor purchases more shares when prices are low and fewer shares when prices are high. In Laymen’s terms, dollar cost averaging is spending money at regular recurring schedule without considering the cost.

A few examples of dollar cost averaging you may already do in your everyday life:

  • Buying gas each week for your vehicle

  • Bi-Weekly/Monthly 401k investment purchases through employer

  • Grocery shopping (sometimes we get that block of cheese on sale, sometimes we pay full price)

Why choose a Dollar Cost Averaging strategy?

  • It takes the decision (emotional) part out of pulling the trigger (you do not have to sit and watch and try to time the market for opportune times to buy).

  • You protect yourself against market fluctuations and minimize risk by buying less shares at high price and buying more at a lower price

  • The focus shifts to accumulating more assets/shares rather than making the quick buck

How do we know this is the right strategy?

  • Longer term investment is required and this approach is generally good for volatile investments (stocks, ETFs, mutual funds)

  • You protect yourself against market fluctuations.

  • If done correctly, this strategy will allow an increase in shares and an average reduced per share price

What else should you know?

  • It is important to still manage the dollar cost averaging

  • Need to set up spend limits and schedule a recurring purchase

  • This strategy does not guarantee a return

  • You should be comfortable enough in an investment to hold for the long term (no “in and out” or checking on it daily)

Example Scenarios: Invest $100,000 in a calendar year

In January, the share price of XYZ stock is $100 per share. The share price of XYZ stock fluctuates throughout the year and at the end of the year (December) the share price of XYZ stock is $90.