In this article
- Why you may need a systematic investment plan
- Easing in rather than plunging into the market
- Helping to equalize gains and losses
- The limitations of Dollar Cost Averaging
To remain financially responsible, everyone must pay bills on a regular basis. These bills include mortgages, utilities, car loans, and credit cards. Unfortunately, many people do not also heed the oft-quoted advice to pay themselves first.
The harsh reality these people may discover is that a steady saving and investing plan is sometimes necessary to help pursue such financial goals as paying for a wedding or new car, buying a house, and funding retirement. Financial experts disagree on the ideal way to invest in order to meet such goals, but one strategy can help you develop a systematic investing plan, while potentially saving you money and easing your mind along the way. It's called dollar cost averaging (DCA). Dollar cost averaging does not assure a profit nor does it protect against a loss in a declining market. This plan involves continuous investment regardless of fluctuation in price levels. You should consider your financial ability to continue purchasing through periods of low price levels.
DCA defined: A system for regular investment
Dollar cost averaging is a technique often used to contribute defined amounts to an investment on a regular basis. As a long-term, disciplined strategy, DCA can help you take advantage of the benefits of compounding to potentially build a sizable sum.
A list of long-term benefits
Through the years, DCA can provide an overall lower share price and more shares.
DCA ensures that your money purchases more shares when prices are low and fewer when prices are high. Over the long term, the result may likely be that the average cost you pay for the shares will be less than the average price.
Example. Assume you invest $50 per month in a mutual fund for 12 months and every month the share price fluctuates a bit. Now assume that your $600 total bought you a total of 42.7 shares. The average price per share, as calculated by adding up the monthly prices and dividing by 12, would have been $14.25. However, the average cost that you would have actually paid, as calculated by dividing the total amount invested by the number of shares, would have been $14.05 per share. Over the years, this method could potentially save you money.
DCA can ease you into the market, rather than plunging you in all at once.
Although DCA does not assure a profit or protect against a loss in declining markets, its systematic investing "habit" helps encourage a long-term perspective, which can be soothing for people who might otherwise avoid the short-term volatility of the riskier, but potentially more profitable, investments such as equities.
Helps to equalize gains and losses.
DCA may also help you make savvy investment decisions if you stick with it.
Example. If your investment rises by 10%, you will likely post big gains because of the shares you've accrued over time. And if it declines by the same amount, take comfort in knowing that your next investment will purchase more shares at a less expensive price. And those shares may regain their value and even exceed the higher price in the future.
|The Benefits Of DCA
|Month||Share Price||Shares Bought|
|AVERAGE PRICE PER SHARE:||$14.25|
|AVERAGE COST PER SHARE:||$14.05|
|Dollar Cost Averaging|
For illustrative purposes only. This hypothetical chart compares making a single investment of $12,000 in stocks with a program of adding $100 monthly to an investment in stocks, beginning on January 1, 2006, while leaving the balance in a money market account.
A long-term strategy to consider: Regular investing through DCA
While investing a lump sum at the most opportune time can potentially profit you more than if you dollar cost average your investment, defining "opportune" is difficult for even the most seasoned experts. As a long-term strategy, you may find DCA to be more appropriate to help increase return potential, potentially lower your average cost per share, and allow you to feel more comfortable during uncertain markets knowing that you make sound investment decisions. Keep in mind that the DCA strategy involves continued investment. You should consider your ability to continue purchasing through periods of low price levels.
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GE 114882 (10/2016)