Dollar Cost Averaging

Dollar Cost Averaging

If you are new to the financial markets and investing, we recommend you discuss dollar cost averaging with an investment advisor prior to making any financial decisions.

Dollar Cost Averaging

Dollar cost averaging is an investment strategy that takes equal monetary amounts regularly and periodically over specific time periods (such as $100 monthly for a specified number of months) in a particular investment or portfolio. Rather than trying to time the market, by doing dollar cost averaging, historically more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost.

In dollar cost averaging, the investor decides on three items:

  • The fixed amount of money invested with each purchase.
  • The fixed investment frequency (ex: monthly, bi-monthly, quarterly, etc.)
  • The length of time over which all of the investments are made.

When an investment in a stock or mutual fund share price goes down in value, the shareholder will buy a larger number of shares and when the shares go up in value they will purchase fewer shares. As the market prices go up and down over a period of time, the average cost tends to be less than if the investor had purchased a lump sum purchase at one time.

For example, if a customer wanted to invest $200 a month for 12 months in a hypothetical mutual fund, the investment would look like the following:

Month

Investment Amount

Per Share Price

Shares Purchased

January

$200.00

$12.00

10.02

February

$200.00

$15.00

12.32

March

$200.00

$7.00

6.52

April

$200.00

$12.00

10.02

May

$200.00

$13.00

10.57

June

$200.00

$9.00

7.68

July

$200.00

$11.00

9.89

August

$200.00

$12.00

10.02

September

$200.00

$13.00

10.57

October

$200.00

$9.00

7.68

November

$200.00

$7.00

6.52

December

$200.00

$10.00

8.63

 

$2,400.00

$130.00

110.44

The average price per share would end up being $10.83 ($130.00 total per share prices divided by the 12 months). The average cost per share would end up being $10.87 ($1,200.00 total investment divided by the total shares purchased). Note that with any investment, there are risks and dollar cost averaging or any other investment type or methodology cannot guarantee a profit.

To speak to an investment advisor about dollar cost averaging and other financial strategies, please contact Integra Financial. Our financial services office is conveniently located in south Denver, Colorado.


1

Analyze your current situation, risk tolerance, time horizon, and goals


2

Open your account


3

Monitor and rebalance investments