Dollar Cost Averaging

Dollar cost averaging is a great way to become a successful long-term investor. It’s simple, quick, and mathematically brilliant.

Dollar cost averaging means depositing a fixed amount of money in a specific investment on a regular schedule. The contribution is made regardless of market conditions. In this sense, the investor doesn’t “time the market.” Instead, the fund is purchased at whatever its market price is on the date of the scheduled buy.

The beauty of dollar cost averaging is that when shares are expensive, you buy fewer of them, and when shares cost less, you buy more.

For example, suppose you made one lump sum investment of $10,000 when XYZ was trading at $50 a share. Ignoring associated fees, you would own 200 shares at $50 a share.

Suppose instead that you purchased $5,000 of XYZ at $50 a share and another $5,000 of XYZ at $45 a share.

As with the previous example, you still invested $10,000. But now you have 211 shares at an average cost of $47.50. That’s more shares at a lower cost.

Though the above example is simplified, with dollar cost averaging, this type of scenario is multiplied over years of investing to create a true average.