Dollar
Cost Averaging
Dollar
cost averaging is the investing of equal dollar amounts in securities
at regular intervals-monthly, quarterly, semiannually, or annually.
At regular intervals, you purchase shares at market value. When prices
are low, you will be able to purchase more shares. When prices are
higher, you will purchase fewer shares. The results over a long period
of time will mean that you have paid an average cost per share that
is lower than the average of the market price.
Why could dollar cost
averaging be successful?
For most investors,
this method of investing allows them to systematically save $100 or
$200 every paycheck, or every month. The continued ability to invest
equal dollar amounts on a regular basis in the same security will
help you save a sizable nest egg over time.
Even though the stock market fluctuates, it has over time gradually climbed
steadily higher. Dollar cost averaging actually could turn the ups and downs
of the market into an advantage.
How can the
variations of the stock market be an advantage?
Because you don't
have to worry about trying to time the highs and lows. You invest
the same amount of money at regular intervals over a long period of
time.
Let's look at these three examples - an up-market, an uncertain market
and a down-market.
In the up-market
you invest $500 regularly while the price per share steadily climbs
from $5 per share to $25 per share. Over a five month period, you've
invested $2,500 and purchased a total of 228.333 shares. Your average
price per share has been $15 ($10 below the highest price per share)
and your average cost per share has been $10.94 (considerably lower
than the highest priced shares).
In
an uncertain market you have invested $500 at regular intervals while
the price per share has fluctuated from $10, up to $15, down to $5
and back up to $10 per share. Your average price per share has been
$10, but your average cost per share has been $8.82.
Dollar
cost averaging does not assure a profit and does not protect against
loss in a continually declining market.
Since this sort of plan involves continuous investment in securities
regardless of fluctuating price levels, an investor should consider
his financial ability to continue his purchases through periods of
low price levels.
The
down-market truly demands investor discipline. You can't quit just
because the market doesn't look good. You have to be persistent to
attain your final goal.
How can you make dollar cost averaging work for you?
One way to participate in this investment technique is to start making monthly
contributions to your employers 401k, IRA, or 403B program if you are an
educator. If your employer does not have a plan set up, then investing in
your own IRA, or into a taxable mutual fund account would be another option.
This is a great way to save. Once you get the program started you won't
even miss this money from your paycheck and you will have started an automatic
plan that will help you to begin to save for your future.
Securities
offered through PMG Securities Corporation, Member NASD,
SIPC
500 Australian Ave S, Suite 850, West Palm Beach, FL 33401 561-820-0019
Investment Advisory Service offered through PMG Asset Management Inc. A
Registered Investment Advisor.
