Dollar-Cost Averaging is an investment strategy that involves buying a fixed dollar amount of an investment on regular intervals, usually monthly. If the price of the investment fluctuates but you purhcase the same amount each month, you will end up purchasing more shares when the price is low and fewer shares when the price is high. Over long periods of time this will decrease your average cost per share, which means you have a greater opportunity for growth.
The easiest way to dollar cost average is to set up a Periodic Investment Plan that will automatically invest a fixed amount each month, so you do not have to remember. Many people are already doing this in their 401(k) or 403(b) accounts on a weekly or bi-weekly basis. In addition to your retirement plans you can dollar cost average into your IRA, Roth IRA or Brokerage account.
Lets look at an example of investing $500 per month for 5 months vs. investing $2,500 in the first month.
|Month||Investment||Share Price||Share Quantity|
Over this 5 month period, you would acquire a total of 286 Shares at an average cost of $8.74.
If you had invested $2,500 on day one you would have aquired only 280 shares at an average cost of $8.92
This may seem like a small difference but over long periods of time it can make a huge impact!
- Seth Renaud & Jeffrey Segal
*Systematic investment plans do not assure a profit or protect against loss in declining markets. Such plans involve continuous investment, regardless of market conditions. Markets will fluctuate, and clients must consider their ability to continue investing during periods of low price levels. This is a hypothetical example and is for illustrative purposes only.