What is dollar-cost averaging?
Dollar cost averaging is an approach to investing in which an individual invests a set amount of money at regular intervals over a long period of time, regardless of whether the prices of the securities purchased are high or low. It is a way to even out the market’s ups and downs by averaging out investment costs over time. By investing regularly, you are buying in to the market periodically, hitting prices that are high, low and in between. With a regular investment plan, such as dollar cost averaging, you can invest small amounts of money over time to build toward a steady investment portfolio. Dollar cost averaging, however, does not assure a profit nor protect against loss in a declining market. Also, since this investment strategy involves continuous investments, regardless of fluctuating prices, investors should consider their financial ability to invest during periods of low price levels. Why Consider Dollar Cost Averaging? Simplicity and Flexibility While dollar cost averaging
An inherent risk of mutual funds is the fluctuating price of shares. Shares that were purchased on Monday for $9.50 may be selling for $9.35 on Tuesday or $9.58 on Thursday. These fluctuations occur because the prices of the securities held by the fund will change based on activities in the securities markets. Dollar-cost averaging is one way to smooth out the effect of market fluctuation on the cost of an investment and occurs when investors make contributions to their account on a regular basis. Dollar-cost averaging involves investing the same amount of money at regular intervals, usually monthly. A convenient way to do this is for an investor to have money transferred from their bank account each month for the purchase of mutual fund shares. The result of dollar-cost averaging is that more shares are purchased when the price is low and fewer shares are purchased during periods of higher prices. In the end, the average cost per share should be lower than the average share price. By
Dollar-cost averaging involves regularly investing a fixed sum — say, $100, $300 or $500 a month. Your Retirement Plan salary deferral contributions automatically transfer into the fund every month. To understand how dollar cost averaging works, consider this example from the Dun & Bradstreet Guide to Your Investments. “You put $100 into a mutual fund every month. The shares fluctuate in price between $5 and $10. The first month you buy 10 shares at $10 each for a total of $100. The second month, because the market dropped, the shares are selling at $5 each, so you buy 20 shares at $5 and so on. At the end of four months you have acquired 60 shares for your $400 at an average cost of $6.67 per share” — even though the average price of a share for the period was $7.50. In short, dollar-cost averaging commits you to a regular investment program (which is good) and guarantees that over the long haul, you’ll buy more shares at lower prices than at higher prices (which is even better). It
