Use dollar cost averaging to invest for your future picture

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with practical tips that you can use today to help your present and future finances!

 

Dollar Cost Averaging Investing
February 2004

Dollar cost averaging is a powerful technique that will help prevent you from buying high and selling low. With dollar cost averaging you purchase and investment with a fixed dollar amount on a recurring basis on a regular schedule. Since stocks and mutual funds fluctuate in prices every day, you are buying shares at different prices, some higher and lower than other purchases. You are buying more shares at lower prices and fewer shares when prices are high. That is the key!

Let me give you a real world example. Let's say you have $6,000 to invest and you want to buy Intel (INTC) stock. It's the start of 2004. At the start of January, Intel is at $32.16 a share. If you invested the full $6,000 at that price, you would have 186.57 shares of Intel. What would happen to your investment for 2004? At the end of 2004, Intel was priced at $23.10 and your $6,000 is now worth $4,309.70, a loss of $1,690.30!

On the other hand, what would have happened if you used dollar cost averaging to invest you $6,000 in a fixed amount every month ($500) during the 2004 year? Here is a table to see what would have happened:

 
Share Price
Shares Purchased
Amount Invested
January
$32.16
15.55
$500
February
$30.32
16.49
$500
March
$29.69
16.84
$500
April
$27.28
18.33
$500
May
$25.61
19.52
$500
June
$28.08
17.81
$500
July
$27.02
18.50
$500
August
$24.9
20.08
$500
September
$21.43
23.33
$500
October
$20.85
23.98
$500
November
$22.44
22.28
$500
December
$23.10
21.65
$500
 
Totals
234.36
$6,000
       

So at the end of the year, you would own 234 shares of Intel with dollar cost averaging instead of 186 shares if you bought at the start of the year. You still would have a loss (234 shares x $23.10 = $5,413.75) but only a $586.25 loss as opposed to $1,690.30 loss if you didn't dollar cost average.

What would it take to break even?

With your one-time lump sum purchase of $6,000 at $32.16 at the start of the year, you would have to get back to $32 a share to break even.

With dollar cost averaging, you would only need Intel to go up $2.31 a share to only $25.60 to break even (234.36 x $25.60 = $6000)!

Dollar cost averaging is a very powerful concept, isn't it? The next great part about dollar cost averaging is very few of us have $6,000 lying around to invest! But everyone can come up with some money to invest every month. It doesn't have to be $500. It could be $50 or $100 a month.

Where can you dollar cost average?

The problem with investing in stocks with dollar cost averaging is that you cannot purchase fractional shares. That was until Sharebuilder came along. You can purchase full and fractional shares of stock in small amounts and have the money debited from your bank account! Sharebuilder only costs $4 a month to invest. I've been using it for about 1 year now and it takes the headache out of investing in stocks.

If you don't feel comfortable picking stocks, then mutual funds are for you. Here you leave it to professional money managers to invest your money for you. When you buy a mutual fund, you are buying a basket of stocks, so your money is automatically diversified. I am quite partial to T. Rowe Price, and Vanguard.

Setting up an account with either Sharebuilder and mutual fund companies is easy and do not require any money up front.

Start dollar cost averaging today!

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