You may be taking advantage ofa powerful investing strategywithout even realizing it. If youparticipate in a payroll deduction retirementsavings plan at your office, or if youhave your own payroll deduction plan,you're taking part in a systematic investmentprocess called dollar-cost averaging.The idea behind dollar-cost averagingis simple. When you invest systematically,you put the decisions of when andhow much to invest on autopilot. Insteadof trying to "time the market,"which canpotentially lead to buying or selling atthe wrong time, you invest a set amountof money at regular intervals.
More for Your Buck
By staying the course through the market'sshort-term ups and downs, dollar-costaveraging ensures that an investorpurchases more shares when prices arelow and fewer when prices are high.
For example, assume you invest $100per month in a mutual fund for 12months, and every month the share pricefluctuates between $12 and $17 a share.At the end of the year, your $1200 buysyou 85.15 shares. The average price pershare (calculated by adding up the variousmonthly prices and dividing by 12) is$14.25. However, the average cost youpaid (calculated by dividing the totalamount invested by the number ofshares) was $14.09 per share. Over theyears, this method could potentially saveyou a lot of money.
In addition, dollar-cost averaging canoffer the psychological comfort of easinginto the market gradually instead ofplunging in all at once. Its method ofsystematic investing habit helps encouragea long-term perspective, which canbe soothing for those who might otherwiseavoid investments that are morevolatile and potentially more profitable,such as equities.
Dollar-cost averaging may also helpphysician-investors make savvy investmentdecisions if they stick with it. Forexample, if your investment rises by10%, you will likely post big gainsbecause of the shares you've accruedover time. And if it declines by the sameamount, take comfort in knowing thatyour next investment will purchase moreshares at a less expensive price—sharesthat may regain their value and evenexceed the higher price in the future.
As a long-term strategy, dollar-costaveraging can help to lower your averagecost per share, while offering a more comfortablebuffer during uncertain markets.You can relax, knowing that you havemade sound investment decisions thatdon't require a lot of adjusting.
Keep in mind, however, that dollar-costaveraging involves regular, periodicinvestments in securities, regardless ofprice levels. You should consider yourability to purchase over long periods oftime and your willingness to purchasethrough periods of low price levels.Additionally, dollar-cost averaging doesnot ensure a profit, nor can it protectagainst loss in declining markets.
is the president of Apollonia Financial Services in
Elkins Park, Pa. All securities offered through Linsco/Private
Ledger, member SIPC. Past performance is no guarantee of future
results. The information presented is the opinion of Scott J. Kleiman and not Linsco/Private Ledger.
Mr. Kleiman welcomes questions or comments at 800-242-1760 or firstname.lastname@example.org. This article
is not intended to provide specific advice or recommendations for any individual. Consult with
your financial advisor if you have questions.
Scott J. Kleiman