Active Money Management News
What is Dollar Cost Averaging?
Dollar cost averaging is an unemotional investment strategy where you invest a fixed dollar amount at regular intervals regardless of the price when you buy. It is not always easy to invest in stocks when the market is declining. Concerns may develop like; what if the market continues to decline after I invest? The fact is, no one can predict the future, and while no two markets are the same and past performance is never an indication of future results, historically what we have experienced might suggest that dollar cost averaging may be a worthy strategy to consider particularly if the market is declining. Let’s assume that you have $1,200 that you want to invest in a particular investment priced at $10 a share. You could invest all of it at one time, have 120 shares, and hope that the price climbs higher. But what if the price goes down? To mitigate this risk, you can dollar cost average $100 at the beginning of every month. In this hypothetical example, the benefit of dollar cost averaging in a declining market is that your average price per share will be less than if you had jumped into the market all at once. Then, if the market climbs higher, you have more shares regardless of the market climb and a lower break-even point than if you had invested everything at $10. It's important to understand that dollar cost averaging will not protect you from loss and does not guarantee a profit. You may lose potential gains if the price per share continues to go up. However, dollar cost averaging has the potential to make what we feel is a significant difference when investing in a declining market.
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