What is Dollar Cost Averaging and How Can It Benefit You?

Most of us realize that it’s difficult even for seasoned investment professionals to predict when to buy a stock or mutual fund at a low price and sell it at a high price to maximize the profit.  Since no one can time the market, one way to build wealth and achieve good or better results over the long-term is through dollar cost averaging.  Simply put, dollar cost averaging is a strategy that involves investing a fixed amount on a regular basis in a particular stock or mutual fund over a significant period of time regardless of the share price.

Let’s say that you invest a certain amount in the same stock or mutual fund on a monthly basis regardless of whether the share price drops or increases.  During periods when the share price drops, your money will purchase more shares and when the share price increases, the amount you invest will buy fewer shares.  But over time, the cost per share is likely to be lower than if you had invested a lump sum at once.

Consider the following example:

Assume an investor deposits $1,000 on the first of each month into Stock ABC, beginning in January.

In January, Stock ABC was $20 per share. By February 1, it was at $16; by March 1, it was $12; by April 1, $17, and by May 1, it was $23.

The investor continues to steadily purchase $1,000 of the stock on the first of each month while the number of shares $1,000 buys varies. In January, $1,000 bought 50 shares. In February, 62.5 shares, in March 83.33 shares, in April it was 58.82 shares, and in May it was 43.48 shares.

Just five months after beginning to contribute to the fund, the investor owns 298.14 shares of the stock. The investment of $5,000 has turned into $6.857.11. The average price of those shares is $16.77. Based on the current price of the shares, the investment of $5,000 has turned into $6,857.11.¹

Dollar-cost averaging doesn't necessarily need to be limited to a single security, though—an investor can decide on a basket of stocks and other securities they want to hold, and then invest in them in set proportions at regular intervals. In fact, this is what most 401(k) accounts do automatically.²

The benefits of investing using dollar cost averaging

• For small or new investors, it is a great way to get started with investing small amounts at a time.
• By investing at regular intervals, the risk of paying too much before market prices drop decreases.
• It is an excellent long-term strategy that works well to build wealth for a 403(b)-retirement account or an IRA.
• Dollar cost averaging puts your money to work on a consistent basis, which is a key factor for long-term investment growth.

To learn how this strategy may help you to achieve your financial goals, contact one of our financial planning specialists who are available to you at no cost as a benefit of your MMBB membership.  You can reach them at 800.986.6222 or via email at [email protected].

1. https://www.investopedia.com/investing/dollar-cost-averaging-pays/
2. https://www.thestreet.com/dictionary/d/dollar-cost-averaging#:~:text=For%20instance%2C%20instead%20of%20investing,every%20week%20for%2020%20weeks

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