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Dollar cost averaging |
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Dollar cost averaging See: Constant dollar plan Dollar cost averaging. Dollar cost averaging means adding a fixed amount of money on a regular schedule to an investment account, such as a mutual fund, retirement account, or a dividend reinvestment plan (DRIP). Since the share price of the investment fluctuates, you buy fewer shares when the share price is higher and more shares when the price is lower. The advantage of this type of formula investing, which is also sometimes called a constant dollar plan, is that, over time, the average price you pay per share is lower than the actual average price per share. But to get the most from this approach, you have to invest regularly, including during prolonged downturns when the prices of the investment drop. Otherwise you are buying only at the higher prices. Despite its advantages, dollar cost averaging does not guarantee a profit and doesn't protect you from losses in a falling market. How to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit webmaster's page for free fun content. |
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Experts say dollar cost averaging is best for people who don't have a lot of money to invest but who can be consistent with a small monthly investment. But while the cash-flow-governed herd ended the 30-year period with a paltry 47 head in the herd, dollar cost averaging calved out 104 head that year--beating even the steady-sized herd by four cows. Koetz advises investors who aren't sure how they feel about going back into the market to put cash into a money market account and set up a dollar cost averaging arrangement. |
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