Dollar Cost Averaging

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• Introduction to dollar cost averaging
• A simple example of dollar cost averaging
• The advantages of dollar cost averaging
• How to use dollar cost averaging

The advantages of dollar cost averaging

The over-riding concern of many investors is the volatility of investment markets, that is, the rise and fall of the markets.

Any investment market is volatile, but it's the stock market which is most widely known for its volatility. A consequence of market volatility is that investors either try to beat the market, through the timing of their investments, or that they don't invest in the market at all.

Dollar-cost averaging actually allows you to take advantage of the volatility of investment markets. For example, when the market falls, you're able to buy more units.

In fact, the more volatile a market, the more money you can potentially make. To demonstrate this, we'll restate the example given on the previous page, this time using greater price fluctuations, that is, a more volatile market.

An Example of a Very Volatile Market

You're able to regularly save $100 per month.

In May, the units cost $1 each, so you're able to buy 100 units.
In June, the cost of the units falls to 80c, so you're able to buy 125 units.
In July, the cost of the units again falls, this time to 65c, so you're able to buy 154 units.
In August, the cost of the units rises to $1.25, so you're able to buy 80 units.

At the end of August, you own 459 units. The cost of the units is now $1.25, so your total investment is worth $574.

The cost of your 459 units over the four months was $400, so the average cost of each unit was 87c.

Your investment has increased from $400 to $574.