The Benefits of Dollar Cost Averaging
With today's roller coaster stock market, a great way for investors to protect themselves against short-term fluctuations in the market is with an investment
strategy called Dollar Cost Averaging (DCA).
Using dollar cost averaging, investors deposit a specific, pre-determined amount each month,
allowing them to purchase a larger
amount of shares when the price is down and a smaller amount when the price is
up. The dollar cost averaging strategy enables investors to accumulate shares of an investment gradually, at an
average price. In most cases, this average price is lower over the long term than if the investor had purchased
the entire investment all at one time. There are many ways that dollar cost averaging can be implemented.
One of the easiest ways is through an Automatic Investment Plan (AIP).
Once set up, the AIP automatically transfers money out of your bank account(s)
and into your investment account(s). The amount invested and the date of investmentand are specified up front. They can, however, be changed if necessary. Often, investors will raise the amount invested, once the strategy is up and running for a while.
Since there is no way to time the market, the dollar cost averaging strategy helps investors potentially purchase shares at a lower overall price.
One of the fundamental rules of investing is that its not your timing of the market that's important, its your time in the market.
Although dollar cost averaging does not assure a profit or protect against a loss in declining
markets, it does allow investors to take advantage of market fluctuations. Investors
should consider their ability to continue regular investments through periods of
low price levels.
| Fixed Monthly Investments |
Mutual Fund Share Price |
Shares Purchased |
|
$200 |
$21.50 |
9.302 |
|
$200 |
$22.50 |
8.889 |
|
$200 |
$23.50 |
8.511 |
|
$200 |
$20.25 |
9.877 |
|
$200 |
$18.75 |
10.667 |
|
$200 |
$23.25 |
8.602 |
Total Amount Invested:
$1,200 |
Total Shares Accumulated:
55.848 |
|
Average cost per share is $21.49 ($1,200 / 55.848 shares). The above example
is hypothetical and for illustrative purposes only.
Source: Idex Funds
