“Dollar Cost Averaging” You Already do it Everyday.
Let Averaging Work in You Favor When Investing.
There are many approaches to continually investing, some of the more experienced investors or traders perform transactions on the swing of stock news and events, others go on the relative cost of the investment or its payout. For everyone else, it kind of comes down to “Dollar Cost Averaging”, that has a nice ring to it and even sounds a bit sophisticated, but it isn’t. Most of us do dollar cost averaging everyday with our groceries, clothing, stopping to buy gas, dining out and so on. Most of the costs for our everyday expenses fluctuate to some degree or another. Although we have an “anchor” price or range in mind, there are still times when the cost is far above or below the set anchor price, like when we pay $6.00 for a bottle of water at the amusement park. Still even then, that cost of $6.00 just get thrown in with the others although it’s the highest, since we only pay it once or twice a year at the amusement park it’s tolerable. The overall average cost of buying a bottle of water hasn’t moved up that much from those one or two purchases. The same happens for when we buy all other things ranging from jeans to socks. With investing, it’s the same thing except that it’s inverted because you’re saving or investing instead of spending. So instead of getting items on sale from time to time and buying maybe one more since it’s at a great price (which I always do), you’re getting more shares each time.
In investing or saving in something like a IRA or 401k, the same thing occurs and allows us to get good average pricing as time goes on. Most folks that have an employer managed 401k also have contributions made on a consistent and ongoing basis. The contributions buy into whatever funds you have selected in the plan. The month the fund may be let’s say $100.00 and next month it’s $125.00 and the contribution is $500.00 per month, during the first month the you purchased 5 shares of the plan and 4 share on the second month. However your average cost per share is $112.50 when you take all of the purchases into account. If the share price were to increase over the following month from $125.00 a share to $130.00 a share, that would just give you already purchased shares more value. Even though it you would buy less at $130.00 your average cost would increase by very little. Conversely, if during the third month the share price were to drop to $120.00 a share then you would have the cushion of the $12.50 per average share difference to shield you before the average value were to be impacted.
This is one of the hidden forces within your 401k and why it can grow so quickly, however, it doesn’t have to work there only. Much like you are doing the same thing when you buy everyday goods, you can also do the same thing in your IRA, savings account, money market account and so on. So if you have an investment consider setting up a monthly feed to it, no matter how small, the consistent purchases of a set amount allows you to buy more when it’s cheap and less when it’s costly. You can really increase your potential with magic of dollar cost averaging.
If you’re planning to do this for an IRA or other savings account, it would probably help to set up an account to pull the funds from. Setup a separate bank account just for the purpose of regular and ongoing drafts to fund an IRA, you can always add your one time hits of hustle money from overtime or selling something on eBay that you come in to from time to time. All of that counts too.