THE BEECHMONT CREST ONLINE GUIDE TO STOCKS AND INVESTING
DOLLAR COST AVERAGING
- The strategy of setting aside a fixed amount of money for investment in a particular asset or a security on a regular basis (weekly/monthly/quarterly, etc.)
- Although the specific amount is up to the individual investor, it is best to set a fixed amount -- as this encourages investor discipline.
- When using dollar cost averaging, the investor purchases more shares when the price is low. Therefore, the average cost per share to the investor is lower than the average cost of the asset over a given period of time.
Important points:
-Discipline and consistency are the keys to successful dollar cost averaging. Suppose that the investor “looses her nerve” when the price of XYZ Company (the stock she has chosen for her dollar cost averaging strategy) is on a downward trend. She stops buying the stock when its price falls. Then she resumes buying it when its price recovers.
-This is a mistake, because she will buy fewer low-priced shares, and more high-priced ones. Dollar cost averaging actually works best with stocks that experience some fluctuation over time. (Otherwise, you never get to take advantage of the lower-priced shares!)
- An important assumption, of course, is that XYZ Company is fundamentally sound. As long the company’s long-term prospects are favorable, then the investor should stick with her dollar cost averaging strategy.