Dollar Cost Averaging
How can you continue to build an investment portfolio when the market is up one day and down the next? With the swings in the market, many people do not know whether they should be buyers or sellers.
The principles of Dollar Cost Averaging can help a nervous investor through the ups and downs of today’s uncertain market. Using this approach, you invest a fixed number of dollars at regular intervals into a selected stock or mutual fund. This discipline helps to avoid two common investment errors:
- Investing all funds in the market when prices are high.
- Selling out at a big loss when prices fall dramatically.
Investing in this manner does not guarantee a profit in and of itself, but it does provide the opportunity to build substantial savings. The great merit of the dollar cost averaging system is that you buy relatively more shares when the market is down and fewer when it is high. Investments are made at regular intervals, regardless of market performance.
Consequently, your average cost per share will be somewhat lower than the average price for the dates on which you purchased shares.
The following illustrates what would happen in a declining market to an initial investment of $1,000 in a mutual fund followed by monthly investments of $100.
Dollar Cost Averaging Illustration
| Month |
Monthly Investment |
Net Asset Value (NAV) |
Shares Owned |
Average Cost per Share |
| December |
1000 |
13.95 |
71.685 |
13.95 |
| January |
100 |
15.34 |
78.203 |
14.07 |
| February |
100 |
15.79 |
84.537 |
14.20 |
| March |
100 |
16.22 |
90.702 |
14.33 |
| April |
27* |
15.78 |
92.426 |
14.36 |
| April |
100 |
16.14 |
98.622 |
14.47 |
| May |
100 |
16.24 |
104.780 |
14.58 |
| June |
100 |
16.90 |
110.697 |
14.70 |
| July |
100 |
17.13 |
116.535 |
14.82 |
| August |
100 |
17.87 |
122.130 |
14.96 |
| September |
100 |
17.03 |
128.002 |
15.06 |
| October |
100 |
14.22 |
135.035 |
15.01 |
| November |
100 |
13.08 |
142.680 |
14.91 |
| December |
397** |
11.24 |
177.969 |
14.81 |
| December |
100 |
11.11 |
186.970 |
14.03 |
Results of Dollar Cost Averaging
Average Market Price per Share:
(Total NAV/Total Number of Investments) |
$15.20 |
Number of Shares Purchased at Average Mkt. Price:
(Total Dollars Invested/Average Mkt. Price per Share) |
172.631 |
Dollar Cost Averaging Price per Share:
(Total Dollars Invested/Total No. shares) |
$14.03 |
Number of Shares Purchased at Dollar Cost Averaging Price:
(Total Dollars Invested/Dollar Cost Averaging Price Per Share) |
186.970 |
*Per share distribution of 30 cent income dividend.
**Per share distribution of 57 cent income dividend and 2.21 capital gains distribution.
