Dollar Cost Averaging
Investors usually want to reduce their market risk and eliminate
some of the guesswork of deciding when to invest. One way
of doing this is dollar cost averaging, according to Pat Swanson,
CFP® and families specialist with Iowa State University (ISU)
Extension’s Invest Wisely Project (www.extension.iastate.edu/investwisely).
“Instead of waiting to invest a single lump sum when you
feel prices are at a low, with this strategy you consistently
invest smaller amounts over a longer period of time --
for example $100 every month,” Swanson explains.
“When prices are low, more shares are purchased and when
prices are high, fewer shares are purchased. While you
may hesitate to buy more shares when the market is going down,
dollar cost averaging works best in this type of market. Over
time the average cost per share of the security may become less. This
way you can accomplish the ‘buy low, sell high’ goal
of successful investing.”
The starting point is to decide how much you can invest each
month or quarter. “Consistency is the key with dollar
cost averaging so make certain you are financially able to invest
the selected amount,” Swanson says. Select an investment
that you want to hold for 5 to 10 years or longer. The
key to dollar cost averaging is to keep to your schedule regardless
of the price of the security.
Swanson says you may already be doing dollar cost averaging
and not realize it. “If you are investing a regular
amount in a 401(k) or other employer retirement plan via payroll
deduction, you are already using dollar cost averaging.”
With other investing, you can also take advantage of automatic
deductions by regularly having contributions deducted from your
This method of investing has a few cautions, according to Swanson.
The cost of commissions to routinely purchase individual stocks
may not make this approach feasible.
This means no load mutual funds that charge no sales fees can
be a good choice for dollar cost averaging. Also, most
mutual funds allow you to purchase fractions of shares.
With dollar cost averaging you still need to monitor your investments,
Swanson says. “Regularly, for example once a year,
re-examine the stocks or mutual fund to see if they are still
a wise investment.”
The ISU Extension Invest Wisely
Project provides a series of newspaper, radio, and web resources
for investors. It is funded by a grant from the Investor
Protection Trust (IPT). The IPT is a nonprofit organization
devoted to investor education. Since 1993 the IPT has
worked with the States to provide the independent, objective
investor education needed by all Americans to make informed
investment decisions. www.investorprotection.org.