“Wonder if this is a good time to invest in stocks?” “Boy, I sure wish I had bought that stock six months ago.” “Trying to guess which direction the market is going sure is frustrating.”
Sound familiar? If you’ve ever agonized over when you should invest, you’ve come to realize it’s never a good idea to try to time the markets. Another strategy? Dollar cost averaging.
Consistency trumps timing
It sounds technical, but dollar cost averaging is quite simple: you invest a consistent amount, week after week, month after month (think payroll contributions going into your 401(k) account) regardless of whether the markets are up, down or sideways. When your investment prices are lower, your fixed dollar amount buys more shares. When prices are up, your dollars buy fewer shares. Over time, your average share price may be lower than if you had invested a large sum all at once.
Autopilot investing at work
Let’s assume you invest $100 a month into a mutual fund. The fund’s share price is different each month so the number of shares you buy also goes up and down each month.
| Month | Investment $ | Share price | Shares purchased |
| 1 | $100 | $12 | 8 |
| 2 | $100 | $10 | 10 |
| 3 | $100 | $14 | 7 |
| 4 | $100 | $10 | 10 |
| 5 | $100 | $8 | 13 |
| 6 | $100 | $8 | 13 |
At the end of six months, you’ve invested $600 and you own 61 shares1. Even though the average cost per share over that six months was $10.33, your average cost per share, thanks to dollar-cost averaging2, is $9.83.
If you had invested your entire $600 in month one, you would have spent $12 per share and purchased only 50 shares.. Of course, if you were lucky enough to invest your $600 in month five when the price was down, you’d own 75 shares at an average cost of $8. But no one can accurately pick that low point with every investment they own. Even the experts don’t have a crystal ball. That’s why dollar cost averaging makes sense for so many investors.
Take your emotions out of the game
Dollar cost averaging builds in the discipline to save the same amount on a regular schedule and takes the emotion out of investing. You don’t have to worry about what your investments are doing at any given time and whether you should invest more or less. You invest the same dollar amount each month and let the law of averages work to your advantage. No timing necessary.
1 Shares purchased have been rounded to the next whole share.
2 Dollar cost averaging cannot guarantee a profit or prevent losses in declining and volatile markets.
