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spring
2003 vol. 8 no. 4
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Dollar Cost Averaging
Craig Hackler
As more retirement savers begin to recognize the benefits
of investing in the financial markets, the question often
arises of when exactly to begin. Should an investor wait for
a market downturn, a type of buying investments “on
sale”? Should he/she invest as soon as possible so as
not to miss the next possible market boom?
If interested in achieving long-term growth of capital,
a seasoned financial advisor might recommend a strategy known
as “dollar cost averaging,” because as too many
investors have discovered, an undisciplined approach to investing
can make portfolios overly sensitive to shifts in market value.
The idea behind dollar cost averaging is simple: Instead of
trying to time market highs and lows, the investor regularly
invests a reasonable amount of money in a simple investment
vehicle over a long period of time.
Such a strategy attempts to take market ups and downs out
of consideration and turns them to your advantage through
discipline. Since the focus of dollar cost averaging is on
long-term results, investors should not be overly concerned
with whether prevailing market conditions are strong or weak
when they begin to invest. What matters, instead, is that
they choose a realistic dollar cost averaging program based
on their individual financial situation, begin that program
and stick with it.
To illustrate how dollar cost averaging might work as an
advantage, let’s assume that an investor decides to
invest $1000 in a mutual fund every three months. If shares
in that mutual fund sell for $10, and no additional charges
are involved, the first quarterly investment would purchase
one hundred shares. Should the market then fall dramatically,
reducing the value of fund shares to $5, the $1000 second
quarterly investment would purchase 200 shares. If the market
were to rebound and fund shares were to rise to $10 in the
third quarter, the next investment would again purchase 100
shares, valued at $10 a piece.
Where would the investor stand after making the purchases
outlined above? He would, of course, own 400 shares, purchased
for a total investment of $3000, with an ending market price
of $10 per mutual fund share. However, the shares would actually
be worth more than was paid for them. The total current value
is $4000 even though the purchase price was $3000.
If this strategy is viewed from another perspective, you can
see that the average cost per mutual fund share of the three
quarters involved ($10 plus $5 plus $10, divided by three)
would be $8.33. The average cost to the investor, however,
would have been only $7.50 ($3000 divided by 400 shares).
The ability to stick with the original investment plan regardless
of changes in prevailing market conditions is the key to success
in dollar cost averaging, and investors should consider their
ability to continue investing during periods of low prices.
Of course, a profit is not guaranteed and dollar cost averaging
will not protect against a loss in declining markets. However,
following a dollar cost averaging plan of action may help
avoid getting out of the market when it’s low and rushing
in when it’s high. Be sure to check with your financial
advisor whether dollar cost averaging can help give you a
discipline for success in the financial markets.
Craig Hackler holds the Series 7 and Series 63 Securities
licenses, as well as the Group I Insurance license (life,
health, annuities). Through Raymond James Financial Services,
he offers complete financial planning and investment products
tailored to the individual needs of his clients. He will gladly
answer your questions. Call him at 512.894.3473 or 800.650.9517
Texas Paralegal Journal © Copyright 2003 by the Legal
Assistants Division, State Bar of Texas.
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