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.
For that reason, financial planners typically use dollar-cost averaging for new clients.
That's not to say dollar-cost averaging protects your client from a falling market.
Many employees don't understand concepts such as dollar-cost averaging and the power of compounding.
Each series of the Capped Funds will be closed to new and additional purchases, other than contributions made under existing pre-authorized chequing and dollar-cost averaging plans, including those series used in segregated fund contracts (GIF Select InvestmentPlus and GIF Select Original 75 Series).
The new product, VULCV-II (the CV stands for cash value), offers enhanced investment choices, dollar-cost averaging from the fixed account at a 6% rate of return and no-lapse provisions determined when the policyholder selects a premium level to guarantee payments of the death benefit, regardless of investment performance.
IA Clarington Investments has introduced a dollar-cost averaging service to help investors to make steady investment in markets.
Since we may not always be able to purchase shares of stocks in large numbers, we recommend investors accumulate shares by dollar-cost averaging.