Dollar Cost Averaging
Dollar cost averaging is a method of purchasing individual assets or a portfolio of assets that uses fixed dollar amounts at regular intervals. The investor purchases more shares as the price is lower and less shares as the price is higher. The result is a lowering of cost basis over time compared to purchasing a fixed number of shares at regular intervals.
Here is an example of how this works. Suppose you make two purchases of an asset or portfolio of assets. At the time of the first purchase, the portfolio of assets has an average price of $90. At the time of the second purchase, the portfolio of assets has an average price of $110.
Using a constant share purchase plan, we purchase 100 shares at $110 and 100 shares at $90 for a total investment of $20,000 and an average cost basis of $20,000/200 shares or $100/share.
Using dollar cost averaging we purchase $10,000 at $90 for a total of 111 shares and then purchase $10,000 at $110 for a total of 91 shares. The average cost basis is $20,000/202 shares or $99/share.
Dollar cost averaging works and the best thing is that it is simple to implement.
The information presented here is the opinion of the author and may quickly become outdated and is subject to change without notice. All material presented in this article are compiled from sources believed to be reliable, however accuracy cannot be guaranteed. No person should make an investment decision in reliance on the information presented here.
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Performance data showing past performance results is no guarantee of future returns.