A Publication of WTVP

Investors have discovered it makes sense to follow a disciplined approach to investing. That’s one reason many financial professionals recommend a dollar-cost averaging strategy to suitable clients as a means of achieving long-term growth of capital. Dollar-cost averaging historically has offered investors benefits in the face of market fluctuations, enabling them to invest at an approximate average cost over time.

What Is Dollar-Cost Averaging?
The idea behind dollar-cost averaging is simple. Instead of trying to guess the timing of market lows and then jumping in, you regularly invest a fixed dollar amount in an investment over a long period of time. You follow the same regularity whether you’re investing in a single investment or a selection of similar investments such as stocks, bonds, or mutual funds.

Since dollar-cost averaging focuses on long-term results rather than the short-term value of your holdings, prevailing market strength or weakness at the time you begin to invest isn’t the crucial factor. What’s more important is that you choose a realistic dollar-cost averaging program based on your individual financial situation and then stick to your plan.

How Dollar-Cost Averaging Works
Assume you invest $500 in a particular stock every quarter. If shares of that stock sell for $10 each, your first quarterly investment would purchase 50 shares, excluding brokerage commissions. If the price falls to $5 a share at the time of your second $500 quarterly investment, you would buy 100 shares. If the stock rose to $15 in the third quarter, your next investment would purchase 33.3 shares. Assume that by the fourth quarter, the stock is back to $10 a share. You then would buy 50 more shares.

Where would you stand after investing at these varied prices? You’d own a total of 233.3 shares, purchased for a total investment of $2,000 ($500 per quarter). With an ending market price of $10 per share of stock, however, your shares actually would be worth more than you paid for them ($2,333.50 in total current value compared with your $2,000 purchase price).
If you view this strategy from another perspective, you’ll see the average price per share for the four quarters would be $10. The average cost to you, however, would be only $8.57 per share ($2,000 divided by 233.3 shares). Please note this example doesn’t take into account sales charges or commissions.

Financial Discipline Is the Key
Your ability to stick with your original investment plan, regardless of changes in market conditions, is the key to dollar-cost averaging. This approach does not, of course, guarantee a profit or protect against loss in a declining market. You also should consider your ability to make regular investments through periods of low prices before using this strategy. However, following a dollar-cost averaging plan of action can help keep you from missing out on the market when it’s low and only investing when it’s high. IBI