Dollar Cost Averaging: A Simple and Systematic Way to Invest
In one way or another, we are all creatures of habit. And by contributing to your employer-sponsored savings plan, you may have formed a powerful habit without even realizing it. If your contributions are automatically deducted from your paycheck, you are benefiting from a systematic investment process called dollar cost averaging (DCA).*
More for Your Money
The idea behind DCA is a simple one: Instead of trying to “time the market” — and potentially buying or selling at the wrong time — you invest a set amount of money at regular intervals. This means that you automatically buy more shares when prices drop and fewer when prices rise. When you compare the higher and lower share prices you’ve paid over time with the number of shares you’ve accumulated, you’ll see an interesting trend develop: The average cost per share will be lower than the average price per share.
Say, for example, you have $100 a month deducted from your paycheck and placed in your retirement plan account. During the first six months of the year, the share prices you paid were $12, $9, $7, $10, $8, and $9. That means you purchased 8.3 shares in the first month, 11.1 shares in the second, 14.3 in the third, 10 in the fourth, 12.5 in the fifth, and 11.1 in the sixth. Spread out over six months, your average price per share would have been $9.17, but the average cost to you per share would have been lower — $8.91.
Easy Does It
Dollar cost averaging is an ideal approach for new or anxious investors, because it puts the decision of when and how much to invest on autopilot. Since your investment moves are consistent and automatic, DCA helps you ease into investing, eliminating much of the guesswork and jitters, while letting the market’s short-term price fluctuations work in your favor.
Although DCA cannot guarantee a profit, nor protect you from losses, for retirement investors and others whose goals are long term, DCA is one investment habit worth forming.
*Dollar cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your ability to continue purchasing shares through periods of low price levels.
©2004 Standard & Poor’s Financial Communications. All rights reserved.
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