Dollar Cost Averaging

Dollar cost Averaging is a means of investment whereby you invest a set amount of money at regular intervals. For most people this means having a payroll-deduction credited to your investment account. More familiar to a lot of folks is their 401K (or 403B for those in the non-profit or public sectors.) Those plans allow you to make choices among their various funds and allocations to each fund.

To explain in simple English, you can have a payroll deduction of $100 dollars and have half go into one fund and half go into another fund. That’s $50 per fund. (Many plans offer a wide variety of choices. I’m making it really basic for illustration purposes)

One fund may be a more conservative one, and the other a growth fund. When the market is ‘up’ your $50 might buy 2 shares of the fund (at $25 per share) while when the market is down the $50 might buy 5 shares (at $10 per share.) Over time, the price you pay per share will lean toward the lower price because you are getting more shares per investment period when the market price is less.

Continuing with that example, if the market is up 5 weeks out of ten with the same fluctuation in price that means you are buying 2 shares for 5 weeks at $25 dollars, and 5 shares for 5 weeks at $10 dollars, average price per share is 35 shares over the ten week period at $14.28 per share.

This is an extreme example just to make the point. Given investments tend to go up over time, dollar cost averaging is a strategy that really works well over long investment periods. Of course, regular investing is the key to wealth, and dollar-cost-averaging is a good strategy to use.

“Dollar” cost averaging is merely an American term. Cost Average Investing would be a more universal phrase, and one I think I shall adopt henceforth.

Questions, concerns, comments and corrections can be directed, as always, to Rob@WealthTrainingSource.com

Solid Investing to All

Rob

Rob@WealthTrainingSource.com

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The columns, articles, message board posts and/or any other features provided on Wealth Training Source are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author’s own and there is no implied endorsement by Robert Britt of any advice or trading strategy