Dollar cost averaging takes some of the guesswork out of investing in the stock market. Instead of waiting to invest a single lump sum until you feel prices are at their lowest point, you invest smaller amounts of money at regular intervals — the same amount each time — no matter how the market is performing. Your goal is to reduce the overall cost of investing by purchasing more shares when the price is low and fewer shares when the price is high. Although dollar cost averaging can’t guarantee a profit or protect against a loss in a declining market, over time your average cost per share is likely to be less than the average market share price.
How Does Dollar Cost Averaging Work?
To illustrate how dollar cost averaging works, let’s say that you want to save $3,000 each year. To reduce the risk of buying when the market is high, you decide to invest $250 in a mutual fund each month. As the following chart shows, this approach can help you take advantage of fluctuating markets because your $250 automatically buys fewer shares when prices are higher and more shares when prices are lower.
| Month | Investment Amount | Market Price Per Share | Number of Shares Purchased |
|---|---|---|---|
| January | 250 | 10 | 25 |
| February | 250 | 10 | 25 |
| March | 250 | 11 | 22.72 |
| April | 250 | 12 | 20.83 |
| May | 250 | 11 | 22.72 |
| June | 250 | 13 | 19.23 |
| July | 250 | 14 | 17.86 |
| August | 250 | 13 | 19.23 |
| September | 250 | 14 | 17.86 |
| October | 250 | 12 | 20.83 |
| November | 250 | 10 | 25 |
| December | 250 | 11 | 22.72 |
*This chart is a hypothetical example and does not reflect the return of any specific investment.
Putting Dollar Cost Averaging to Work for You
You may not realize it, but if you’re investing a regular amount in a 401(k) or another employer-sponsored retirement plan via payroll deduction, you’re already using dollar cost averaging. In fact, you can use dollar cost averaging to invest for any long-term goal. It’s easy to get started, too. Many mutual funds, 529 plans and other investment accounts allow you to begin investing with a minimal amount as long as you have future contributions deducted regularly from your paycheck or bank account and invested automatically.
If you’re interested in dollar cost averaging, here are a few tips to help you put this strategy to work for you:
Get Started as Soon as Possible
Once you’ve decided that dollar cost averaging is right for you, start investing right away. The longer you have to ride out the ups and downs of the market, the more opportunity you have to build a sizeable investment account over time.
Stick With It
Dollar cost averaging is a long-term investment strategy. Make sure that you have the financial resources and the discipline to invest continuously through all types of markets, regardless of price fluctuations.
Take advantage of automatic deductions
Having your investment contributions deducted and invested automatically makes the process easy and convenient.
If you have questions or need assistance, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Disclosures: The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
