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  3. The Value of Dollar Cost Averaging

The Value of Dollar Cost Averaging

Submitted by Davenport Watts & Drake Investment Advisors, LLC on December 21st, 2016

 

If you are currently contributing a part of your earnings to a qualified retirement plan, such as a 401(k) plan, you are already applying the dollar-cost averaging strategy.  Fundamental to the strategy is a commitment to investing a fixed amount at a fixed time- whether it’s $50 or $500 each month of every-other-month for example.  Each month, your fixed amount will buy a certain amount at the then current prices. As prices decline, your fixed amount will be able to buy a higher number; when prices increase, less is purchased.  If the overall trend for stock prices is up, as it has been since the inception of the stock market, your average purchase price, or cost-basis, will always be less than the prevailing share price.  Of course, it would be important to follow this strategy through at least a few market cycles (up and down markets) to realize the full value of dollar-cost averaging. You can, however, get a sense of how dollar-cost averaging will work in your favor in just a few short months.

Let’s say you decided to start investing after the stock market has reached new highs. If you start to invest $500 a month in a stock index fund priced at $20 a share, your initial investment will purchase 25 shares. If the stock index immediately declines in value to $15 a share, your next monthly investment would buy 33 shares. You will then own 58 shares with an average cost-basis of $17.17 per share. If the stock index climbs to new highs the next month, and the share price reaches $30 a share, you will add 16 shares for a total of 74 shares, and your average share price will be $20.27, almost $10 below the current share price.

Another value of dollar-cost averaging is that you don’t need to worry about investing at the top of the market or trying to determine when to get in or out of the market. As long as the stock market continues with its historical, upward trend, with periodic declines, the value of your portfolio will be higher than your average cost-basis.

The key to its success is your ability to commit to a systematic process of setting aside a fixed dollar amount (that can be increased as your cash flow allows), and following a disciplined investment strategy that includes broad diversification across several stock market segments. 

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Davenport Watts & Drake Investment Advisors, LLC (DWD) is a Registered Investment Adviser, duly registered with the State of Mississippi in accordance and compliance with applicable securities laws and regulations.  In that the firm may only transact business in states in which it is properly registered as an independent advisor or in which it is exempted or excluded from the registration requirement, only residents of the State of Mississippi and those states with an established de minimis rule may receive investment advisory support services accordingly from DWD.  DWD does not render personalized investment advice over the internet.  In no event shall the presence of this website on the internet be interpreted or construed as a solicitation to provide investment advisory services outside of the State of Mississippi or outside of those states with an established de minimis rule regulating the sole and exclusive jurisdiction in which DWD is registered as an investment adviser.  In the future, should DWD seek to solicit investment advisory clients in states outside of the State of Mississippi or outside of those states with an established de minimis rule, an investment advisor registration would first be procured by the firm in such state or states outside of the State of Mississippi or those states with an established de minimis rule. 

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