dollar-cost averaging


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Dollar-Cost Averaging

An investment strategy in which one makes investments in the same dollar amount at regular times. For example, one may buy $1,000 in Stock A every month, regardless of Stock A's current price. Because this means one buys fewer shares when the price is high and more when the price is low, dollar-cost averaging aims to reduce the average cost of the shares one buys. This increases the profit per share when one sells the stock. Dollar cost averaging is most common with shares of a mutual fund or a retirement plan. It is also called a constant dollar plan.

dollar-cost averaging

Investment of a fixed amount of money at regular intervals, usually each month. This process results in the purchase of extra shares during market downturns and fewer shares during market upturns. Dollar-cost averaging is based on the belief that the market or a particular stock will rise in price over the long term and that it is not worthwhile (or even possible) to identify intermediate highs and lows. Also called averaging.
What types of investors should use dollar-cost averaging?

When asked what the market was going to do, J. P. Morgan reportedly said, "It will fluctuate." Morgan was right! This concept refers to putting a fixed amount of money into securities periodically. In so doing, one's average price per share is lower than the mean average price during the holding period. This is basic math: $100 buys 10 shares of a stock at $10, and 5 shares at $20 when the market is higher. The mean average price is $15. But the investor owns 15 shares and paid just $200 for an average price per share of just $13.33. TIP: A good approach for smaller investors just getting started, and also for IRAs. It works particularly well with diversified mutual funds.

Thomas J. McAllister, CFP, McAllister Financial Planning, Carmel, IN
References in periodicals archive ?
It's fortunate that most American investors already invest via dollar-cost averaging plans in their employee-sponsored retirement plans.
That's not to say dollar-cost averaging protects your client from a falling market.
Dollar-cost averaging is a strategy through which investors put equal dollar amounts into stocks or bonds at regular intervals, thereby buying fewer shares when prices are high and more shares when prices are low.
Other features include asset-allocation balancing and dollar-cost averaging.
While dollar-cost averaging does not ensure a profit or protect against a loss in declining markets, it can help neutralize the impact of market swings over time.
Extension of a 12-month Dollar-Cost Averaging (DCA) special to Lincoln VUL(DB)-II, Lincoln SVUL-III, and to Lincoln VUL(CV)-III.
They employ a dollar-cost averaging strategy within their portfolios, contributing $500 a month to both the Nations Blue Chip Investor Fund B (NBCBX) and the Alliance Bernstein Value Fund B (ABVBX).
Dollar-cost averaging can account for as much as 70% of new money flowing into variable products, he said.
The ABC Investment Plan(R) is a dollar-cost averaging program that allows investors to build a position in a fund with an automatic investment of at least $100 per month.
Most financial services companies can arrange for a set dollar amount to be transferred directly from your checking account or after-tax payroll check to your IBA to take advantage of dollar-cost averaging.
00, reinvest dividends for free and implement automated dollar-cost averaging techniques through BUYandHOLD's E-ZVest(SM) service, which allows investors to make automatic investments on a weekly, monthly or quarterly basis.