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Dollar Cost Averaging

Investor Economic and Financial Education

One way to hedge against short-term fluctuations is with an investment strategy called Dollar Cost Averaging (DCA).

The premise of this strategy is to invest a specific amount of money each month regardless of market conditions. This allows you to purchase a larger amount of shares when the price is down and a smaller amount when the price is up. DCA will enable you to accumulate shares of an investment gradually, at an average price that often is lower over the long term than if you had purchased the entire investment at once. There are many ways you can implement this strategy, but one of the easiest is through an Automatic Investment Plan (AIP). Once set up, your AIP automatically transfers money out of your bank account(s) to your account(s) in the amount and on the date you specify.

Because no one can predict the best time to invest, this example illustrates that the most important step is the first one-to begin investing. Remember that its not your timing of the market that's important, its your time in the market.

Although DCA does not assure a profit or protect against a loss in declining markets, it does allow you to take advantage of market fluctuations. Investors should consider their ability to continue regular investments through periods of low price levels.

Fixed Monthly Investments Mutual Fund Share Price Shares Purchased
$200 $21.50 9.302
$200 $22.50 8.889
$200 $23.50 8.511
$200 $20.25 9.877
$200 $18.75 10.667
$200 $23.25 8.602
Total Amount Invested:
$1,200
Total Shares Accumulated:
55.848

Average cost per share is $21.49 ($1,200 / 55.848 shares). The above example is hypothetical and for illustrative purposes only.

Source: Idex Funds





 








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