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Dollar Cost Averaging

Radio Transcript, 2 minutes 15 seconds, for use during week of September 10.

Description: Penny, Susan, and Ira discuss dollar cost averaging as an investment strategy.

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection Trust, providing investor education on the web at: investorprotection.org.

Ira: Penny, we’ve talked about the need to consider asset allocation and to regularly evaluate and rebalance our portfolios.  I’ve got friends who say I should be sure to ‘buy low and sell high.’  Is that going to be the best way for me to adjust and add to my portfolio?

Penny: Ira, as you’ve probably discovered, buying low and selling high is often easier said than done.  Let’s look at another investment strategy that’s designed to reduce market risk and eliminate some of the guesswork of deciding when to invest--that’s dollar cost averaging.

Susan: I’ve heard of that, Penny, but I’ve never really understood what it means.

Penny: Instead of waiting to invest a single lump sum when you feel prices are at a low, with dollar cost averaging, you consistently invest smaller amounts over a longer period of time.

Ira: So, rather than investing, say, 1000 dollars all at once, I’d invest 100 dollars every month?

Penny: Yes, when prices are low your 100 dollars, or whatever amount you decide on, would buy more shares and when prices are higher, you would purchase fewer shares.

Susan: What if the market is dropping, Penny?  Should I continue to purchase shares in that environment?

Penny: While you might hesitate to buy when the market is going down, dollar cost averaging is actually most advantageous in that kind of market.  Over time, the average cost per share of the security will become less.

Ira: So rather than trying to time my purchases to the lowest price for a particular security, I should plan to invest a specific amount each month.

Penny: Yes.  And you can take advantage of your bank’s automatic deduction to have that amount withdrawn regularly.

Susan: Thanks, Penny, as always your information is very helpful.

Penny: You’re welcome.  And remember, for more information, visit the ISU Extension website at extension.iastate.edu and look for ‘Invest Wisely.’

 
 
         
         

Updated September 10, 2007