Dollar Cost Averaging
"This is one of my favorite strategies because it
can be put into place regardless of your current financial
status."
- Allyson Lewis, author of
The Million Dollar Car and $250,000 Pizza
What matters the most is not how much you invest, but simply
that you do invest. You can always increase your investment
amounts as time passes and your income increases, but what's
most important is to:
- Start now.
- Start small if you have to.
- Be consistent.
It can be pretty frightening to dump a large sum of your
hard-earned money into an investment all at one time. That's
why it makes sense to invest gradually, with small amounts
over time.
Better yet, the advantage to regular investing--which is
also called dollar cost averaging--is that you may actually
buy more shares over time than you would if you invested your
money all at once. See how this works in the table, below.
Invest $200 a month for six months:
|
Month
|
Price Per Share
|
Number of Shares Purchased
|
|
January
|
$15.00
|
13.33
|
|
February
|
$15.00
|
13.33
|
|
March
|
$13.00
|
15.38
|
|
April
|
$12.00
|
16.66
|
|
May
|
$14.00
|
14.28
|
|
June
|
$10.00
|
92.98
|
|
Total
|
$79.00
|
92.98
|
|
Total Investment
|
$1,200.00
|
|
|
Average PRICE per share
|
$79 / 6 = $13.16
|
|
|
Average COST per share
|
$1200 / 92.98 = $12.90
|
|
When prices rise, your regular investment buys fewer shares.
When prices drop, your same investment buys more shares. The
result is that the average cost per share ($12.90) over time
will generally be lower than the average price you paid ($13.16).
This strategy allows you to take advantage of market fluctuations,
so you can feel good about your investment plan even when
stock prices tumble. That's when you'll do the best bargain
basement shopping.
|
