Home
> Mutual Fund Investments
> Dollar-Cost Averaging
The Power of Dollar-Cost Averaging
Ask any astute investor the key to successful
investing and the answer will be patience. This is perhaps the most
difficult lesson any investor can learn. Hand-in-hand with patience
goes the time-tested discipline of investing for the long term.
Money managers will tell you that, in most cases, a long-term approach
to investing is a wise choice. Dollar-cost averaging is an important
tool investors can use to bring stability and discipline to an investment
portfolio. This method of systematic investing helps minimize risk
while making investment dollars work harder. Let's imagine that
you use a periodic investment program in which you select a mutual
fund and then buy the same number of shares each quarter, no matter
what the price. You buy 100 shares each quarter for four quarters,
and sell the whole investment in the fifth quarter (Case
A). Now let's use the same mutual fund, with the same price
movement--but instead of buying 100 shares each quarter, let's say
you're investing $1,000 each quarter. Again, you sell the whole
investment in the fifth quarter (Case B). Here
are the results of the two strategies.
Case A
| Month |
Investment |
Price |
Shares Bought |
Shares Sold |
Proceeds |
| March |
$1,000 |
$10 |
100.00 |
|
|
| June |
800 |
8 |
100.00 |
|
|
| September |
1,000 |
10 |
100.00 |
|
|
| December |
1,200 |
12 |
100.00 |
|
|
| March |
|
13 |
|
400 |
$5,200.00 |
Case B
| Month |
Investment |
Price |
Shares Bought |
Shares Sold |
Proceeds |
| March |
$1,000 |
$10 |
100.00 |
|
|
| June |
1,000 |
8 |
125.00 |
|
|
| September |
1,000 |
10 |
100.00 |
|
|
| December |
1,000 |
12 |
83.33 |
|
|
| March |
|
13 |
|
408.33 |
$5,308.33 |
In both cases, you’ve invested
the same total amount of money in the same fund at the same times,
at the same prices, and sold at $13 a share.
But by investing the same amount of money each period,
you've bought more shares when prices were low, fewer shares when
prices were high. So instead of 400 shares for your original investment
of $4,000, you bought 408.33 shares. Your average price per share
was $9.80 instead of $10. The result? Instead of 30%, you've made
33%. Dollar-cost averaging has put you $108.33 ahead.
Of course, dollar-cost averaging in itself does not
ensure a profit. If you sell your shares at less than the average
price you paid for them, you'll have a loss. However, dollar-cost
averaging does lower the price you have to get to break even.
If you can set aside a specific amount of money periodically,
and invest it in a security that should rise in value over time,
you're making full use of dollar-cost averaging--an investment discipline
that makes sense for intermediate- and long-term investors.
For more information, contact a Financial Consultant
at the Investors Security, Inc. office.
top |
