Dollar Cost Averaging

Which investment would you make? dollar cost averaging table regina

While it might appear obvious, the real answer could surprise you. You see, it depends on whether your investment is a one-time lump sum amount, or if you’re dollar cost averaging.

Prepared by Keybase Financial Group, using Hypothetical data. Numbers are rounded to the nearest decimal.

If you’re investing a lump sum of money, it’s as simple as “buy low, sell high.” The only thing that matters is how much the investment’s price changes over your holding period. However, if you’re regularly investing over time, for instance through a retirement plan or periodic investment plan, the fact that you’re accumulating more shares when investment prices are down entirely, changes the equation. 

The person investing $100.00 per month in Investment #1 is buying shares that are steadily appreciating. The people buying shares in Investments #2 and #3 are also investing $100.00 per month, but as you can see the share prices go down from the initial purchase and increase with the later purchases.

So how did each investor do?

dollar cost averaging results

So, after all is said and done, investors in Investments #1 and #2 come out almost exactly identical, while the investor in Investment #3 was the big winner, over a 6-month period. 

The moral of the story is that long term investors can actually benefit if prices are falling while they’re accumulating shares. The key is to stick with an investment philosophy despite the very human reaction to shun making further investments if prices fall. If you’ve already made a lump sum investment, buying additional shares lowers your overall average cost per share, and might be a very effective strategy given current market conditions. 

Paying yourself regularly isn’t really such a foreign concept. Many of us already commit to saving a specific amount each month; although if you’re like most, you’re probably not as disciplined about it as you’d like. You may save some months and you may save nothing at all in other months. There’s a simpler approach that allows you to save regularly, while investing for your future. It’s called: Dollar Cost Averaging.

DISCLOSURE: The above example is for illustrative purposes only and does not reflect the actual return of any particular investment. There can be no guarantee that any particular yield or return will be achieved from any investment. Dollar Cost Averaging is not a fool proof investment technique. It does not assure a profit, and does not protect against loss in declining markets. It involves continuous investment in variably priced units, regardless of price fluctuations. Investors contemplating the use of Dollar Cost Averaging should consider their ability to continue purchases over a period of time even when prices are low. The opinions expressed within this article/communication are those of the Financial Advisor and are not necessarily those of Keybase Financial Group Inc.