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Dollar Cost Averaging

How Dollar Cost Averaging Works
The chart below shows an individual who systematically invests $1,500 each month for 3 months.

In this hypothetical example, the average price per share over this period was $20.

However, the average price paid by the investor using the dollar-cost averaging technique was only $16.36.

This represents a hypothetical saving over the 3 months of $1,000.

Month Market Price 1 $20 per share 2 $30 per share 3 $10 per share     Average Market Price   = $60/3 = $20 per share

Fixed Monthly Investment Purchase Price $1500 ÷$20 = 75 shares $1500 ÷$30 = 50 shares $1500 ÷$10 = $150 shares     Average Purchase Price   = $4500/275 shares = $16.36 per share

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When asked what the markets were going to do, renowned investment banker J P Morgan reportedly said, “It will fluctuate.”

We agree with Mr Morgan. Most of the market’s gains occur in just a few strong, but unpredictable, periods. You have to stick to a clear plan of regular investing to be sure you are in the market during these times.