Dollar Cost Averaging: A Simple and Systematic Way to Invest

When the economy and the stock market send mixed signals, investors inevitably ask, "Is this a good time to invest?" But without a crystal ball, you'll never know for sure when to move in and out of the market -- and if you guess wrong, you could miss out on the market's best days.

 

A better approach for uncertain markets may be to use an investment process called dollar cost averaging (DCA).

 

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 may see an interesting trend develop: The average cost per share may be lower than the average price per share.

 

Say, for example, you invest $100 a month in mutual fund shares. 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 -- $8.92.

 

Dollar cost averaging puts the decision of when and how much to invest on autopilot. Since your investment moves are consistent and automatic, it helps you ease into investing, potentially eliminating much of the guesswork and jitters, while potentially letting the market's short-term price fluctuations work in your favor.

 

Although dollar cost averaging cannot guarantee a profit, nor protect you from losses, for investors whose goals are long term, it may be one investment habit worth forming.

 

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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

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