Dollar Cost Averaging

Dollar Cost Averaging

November 27, 2023

Dollar cost averaging is a simple, efficient way to invest that can possibly lower your market risk. Whether you realize it or not, if you are utilizing a company sponsored retirement plan, you are already dollar cost averaging. I will quickly explain what this is, how it’s beneficial and some scenario’s that it is used.

Dollar cost averaging is the practice of investing an equal number of dollars into the market at regular intervals. For example, someone might invest $100 per month, on the first business day of every month, for a set period of time such as one year. Theoretically this would be done regardless of how the market is performing at that time and also into the same investment over that period. The reason that this is beneficial is that you are lowering your average cost per share of the funds you buy. The same $100 every month will buy a different number of shares than it does in other months due to market fluctuations. If the stock market goes up, your $100 will buy fewer shares. Conversely, if the market goes down, your $100 will buy more shares.

There are several benefits of using dollar cost averaging to invest. First, because of the fact that you invest equal dollars every month and therefore your money buy more or less shares than the previous month depending on the market, you can actually lower your average cost per share. Secondly, it is often more appetizing to those that are risk averse to buy into the market slowly rather than all at once. For that type of investor, they are worried that if they invest all at once and the market declines that they will have a loss position in their portfolio. As I mentioned in the beginning, this is also how most participants utilize their employer sponsored plan since a set percentage of their salary contribution gets converted to dollars and then is invested equally at regular intervals.

Dollar cost averaging can be a very sound strategy to invest in the market for many types of investors.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.