Tuesday, October 24, 2017

Dollar Cost Averaging

Have some money to invest, but worried about entering the market at a bad time? Dollar Cost Averaging (DCA) might be right for you. DCA is an investment strategy where you take a sum of money, divide it into equal parts, and invest those parts on a regular schedule regardless of share price. When share prices are low, you are buying more shares. When share prices are high, you are purchasing fewer shares.

For example, let's say you received a bonus check in January for $12,000 and you want to invest it in Company A. We'll break it up into 12 investments of $1,000 each. Let's also assume that there is a drop in share price during the year. The table below shows the purchases that you would make.

Month Investment Share Price Shares Purchased
January $1,000 $50 20
February $1,000 $50 20
March $1,000 $40 25
April $1,000 $40 25
May $1,000 $25 40
June $1,000 $25 40
July $1,000 $25 40
August $1,000 $40 25
September $1,000 $40 25
October $1,000 $40 25
November $1,000 $50 20
December $1,000 $50 20
Total $12,000 $36.92/share 325

As you can see, you would have purchased 325 shares at an average price of $36.92/share. Your shares would be worth $16,250 in December. If you had purchased it all at once, you would have purchased 240 shares at $50/share. In this example, you would be even in December.

However, DCA is not always the right way to go. If share prices did not dip, investing as one lump sum would have produced better results. You are giving up potential profits in order to minimize risk.

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