Dollar Cost Averaging

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Dollar Cost Averaging

Dollar cost averaging is another wonderful investment strategy that merits serious consideration by newer investors. In dollar cost averaging, you invest a specific amount at a regular interval: taking a set amount out of each paycheck, for example. The critics are undecided whether this type of investing produces an optimal or a mixed result, and statistics can be found to accommodate either view. What is certain, however, is that dollar cost averaging does not produce bad results, and it brings people to the table who might not otherwise be investing.

Plain English

Dollar cost averaging is an investment strategy whereby an investor systematically invests a predetermined amount on a regular basis.


One of the single biggest excuses people give for not being in the stock market is that they don't have enough extra money to invest. However, if the average investor waited until he or she had hundreds of thousands of dollars to invest before becoming active, the American stock market would be a very different place than it is. People with large portfolios are rarely those who have received a lump sum equal to the current size of their portfolios. Rather, these large portfolios were created by making systematic smaller investments.

Regardless of the potential for optimal return with this strategy, the primary benefit of dollar cost averaging is to get people to invest relatively small amounts, which are intended to add up to a larger amount. Again, this strategy really works. The example of the $10,000 goal used in Lesson 11, "How to Pick Stocks," was not the result of a $10,000 initial investment, but rather the accumulation of systematic investing over a year's time.

By the way, dollar cost averaging is not guaranteed to produce higher stock prices for people who choose to invest this way. Should you be concerned about the price you will pay for stock as it fluctuates over the period of a year, you can use the following table to chart the average price you would have paid for a stock by using dollar cost averaging versus the average price of the stock over the same period. Used in retrospect (over the previous year), you can garner a pretty good idea of the potential for an optimal price using dollar cost averaging to purchase your prospective stock.

Month Price per Share Number of Shares Investment Would Purchase
January    
February    
March    
April    
May    
June    
July    
August    
September    
October    
November    
December    

To make the comparison, begin by finding the market price of the stock on the same day each month (say the first) of the previous year and listing it in the second column. Then determine how many shares your regular investment would have purchased each month and write that number in the third column. Next take the total number of shares you would own at the end of the year, add them together, and divide by 12. Do exactly the same with the price of shares, and compare how much the price you paid for each share differs from the average price of the share over the same period. You'll be surprised.

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Stock Market Investing 10 Minute Guide
Stock Market Investing 10 Minute Guide
ISBN: 0028636104
EAN: 2147483647
Year: 2000
Pages: 130
Authors: Alex Saenz

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