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Pay Yourself First - and Regularly - With Dollar Cost Averaging

To remain financially responsible, everyone must pay bills on a regular basis. These bills include mortgages, utilities, car loans and credit cards. Unfortunately, many people do not also heed the oft-quoted advice to pay themselves first.
The reality is that a steady saving and investing plan is sometimes necessary to help pursue such financial goals as paying for a wedding or new car, buying a house and funding retirement. One strategy that can help you develop a systematic investing plan, while potentially saving you money and easing your mind along the way, is dollar cost averaging (DCA).

DCA Defined

Dollar cost averaging is a technique in which investments of defined amounts are made on a regular basis.1 As a long-term, disciplined strategy, DCA can help you take advantage of the benefits of compounding to potentially build a sizable sum.

Aside from offering a disciplined, trouble-free way to save and invest, another potential benefit of using DCA is that it ensures that your money purchases more shares when prices are low and fewer when prices are high. Over time, the result could be that the average cost to you may be less than the average share price. For example, consider the accompanying chart, which shows the result of investing $50 in stocks every month for 12 consecutive months.2

As you can see, every month the share price fluctuates a bit, and by the end of the 12-month period, your $600 would have bought you 42.7 shares. The average price per share, as calculated by adding up the monthly price and dividing by 12, would have been $14.25. However, the average cost that you would have actually paid, as calculated by dividing the total amount invested by the number of shares, would have been $14.05 per share. Over the years, this method could potentially save you a lot of money.

The Benefits of DCA
Month Share
Price
Shares
Bought
Jan $15 3.3
Feb $13 3.8
Mar $12 4.2
Apr $14 3.6
May $13 3.8
June $12 4.2
July $13 3.8
Aug $14 3.6
Sept $16 3.3
Oct $16 3.1
Nov $17 2.9
Dec $16 3.1
Total Shares 42.7
Avg Price/Share $14.25
Avg Cost/Share
using DCA
$14.05

Dollar cost averaging also can offer the psychological comfort of easing into the market gradually instead of plunging in all at once. Although DCA does not assure a profit or protect against a loss in declining markets, its systematic investing “habit” helps encourage a long-term perspective, which can be soothing for people who might otherwise avoid the short-term volatility of riskier, but potentially more profitable, investments, such as equities.

And last, DCA may help you make savvy investment decisions if you stick with it. For example, if your investment rises by 10%, you will likely post big gains because of the shares you have accrued over time. And if it declines by the same amount, take comfort in knowing that your next investment will purchase more shares at a less expensive price—shares that may regain their value and even exceed the higher price in the future.3

Regular Investing Makes Sense

As a long-term strategy, you may find DCA can help to potentially lower your average cost per share, while allowing you to feel more comfortable during uncertain markets. Keep in mind, however, that you should consider your ability to purchase over long periods of time and your willingness to purchase through periods of low price levels.



1Periodic investment plans do not assure a profit and do not protect against loss in declining markets. Dollar cost averaging is a strategy that involves continuous investment in securities regardless of fluctuating price levels of such securities, and the investor should consider their financial ability to continue purchasing through periods of low price levels.
2Source: Standard & Poor’s. Stocks are represented by the S&P 500 index.
3Past performance is no guarantee of future results.

This article was prepared by S&P Capital IQ Financial Communications and is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor, or me, if you have any questions.

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness, or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special, or consequential damages in connection with subscribers’ or others’ use of the content.

 

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