Among basic investment strategies, dollar-cost averaging has a well-deserved role. The idea is simple: invest a certain amount at regular intervals. You might invest $1,000 a month into a mutual fund, or $2,000 each quarter, or follow a similar plan.
To see how it works, say you are investing $1,000 every month in fund ABC. For the next six months, here are the per-share prices:
April: $25
May: $20
June: $15
July: $20
August: $30
September: $25
With dollar-cost averaging, you buy more shares when prices are down, fewer shares when prices are up. In this example, your monthly purchases would be 40 shares, 50 shares, 66.7 shares, 50 shares, 33.3 shares, and 40 shares. Altogether, you’ve invested $6,000 ($1,000 a month for six months) to buy 280 shares.
At the current price of $25, your 280 shares are worth $7,000. Thus, while the price ended at the same level as it began, you’ve actually made a $1,000 profit.
Of course, dollar-cost averaging won’t save you from a horrendous stock market crash. This technique will prevent you from investing all of your money at a market top. You’ll buy at market lows as well as highs, reducing your cost per share, and stand a good chance of becoming a successful long-term investor.
