Dollar-cost averaging is an investment strategy that aims to reduce the impact of volatility on large purchases of financial assets such as equities. It is a simple technique that entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period of time. This means that during times of rapidly rising share prices, the investor will have a higher cost per share than they otherwise would have had. During times of falling stock prices, the investor will have a lower cost per share than they would have had.
Dollar-cost averaging is a strategy, and it’s one that certainly will get long term results that are as good or better than aiming to buy low and sell high. Instead of trying to time the market, it is a great way of making your average cost lower.
How dollar-cost averaging works
Assume an investor, Mike, wants to invest $500 a month from his pay. As shown in the table below:
- Mike decides to invest $100 in April, $200 in May and $200 in June
- Mike purchases shares each month, at the price-per-share noted in the chart
- By using dollar-cost averaging, Mike ends up with (38.8) shares at an average cost of $(12.67)
- This makes his “average cost per share” (0.33) cents lower than the “current price per share” because Mike’s fixed monthly investment buys more shares when prices are lower
How to use Dollar Cost Averaging
The strategy couldn’t be simpler if you are a long term investor. Invest the same amount of money in the same stock or mutual fund at regular intervals, each paycheck. Ignore the fluctuations in the price of your investment. Whether it’s up or down, you’re putting the same amount of money into it and your money will compound over time. An advantage of this method is that it will help reduce the impact of market volatility by buying more shares when prices are lower and fewer shares when prices are higher.
Benefits of dollar-cost averaging
Reduces risk
Dollar-cost averaging reduces your risk, which I think is vital to any investment strategy, REDUCE RISK. By keeping a small percentage of your money in cash for a period of time, this strategy will be less susceptible to a market crash.
Buy Low Sell High
Some people argue that Dollar-cost averaging will increase your returns. Because you contribute a pre-defined amount of money at pre-defined intervals, you will automatically buy more shares when the stock market is down and fewer when the market is up. This means that you should get a better average cost for whichever specific stock you are buying.
Should you Dollar Cost Average?
Yes, if you are in the market for the long ride i 100% believe everybody should implement this investment strategy. It helps long term investors buy-in with less anxiety and ALWAYS buy the dips.
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