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| | | What is Dollar Cost Averaging Dollar cost averaging is the practice of investing a set amount of money in a stock / mutual fund / exchange-traded fund at predetermined intervals, regardless of the price of the asset. Now let me try that again another way. Dollar cost averagers follow the following three basic tenets: - Invest the same amount of money at regular intervals - Buy as many shares as you can with the money you have - Don't worry about the price Imagine you have $1,000 to invest every month and that you like the SPY—the exchange-traded fund (ETF) that tracks the value of the S&P 500. Some investors may choose to hold onto their $1,000 each month until they see a good time to put all of the money into the SPY at once. Dollar cost averagers are different. They choose to take their $1,000 each month and buy as many shares of the SPY as they can each month, regardless of the price. If the price of the SPY is $100 one month, a dollar cost averager will buy 5 shares of the SPY that month. If the price of the SPY is $125 the next month, a dollar cost averager will buy 4 shares of the SPY that month. [To learn more, click hear to watch the video on Exchange-Traded Funds] The theory behind dollar cost averaging is that if you buy at regular intervals using the same amount of money each time, you will buy more shares when the share price is low and you will buy fewer shares when the share price is high. Hopefully, this will keep you from buying too many shares when the share price is too high and will lower your overall cost per share. Unfortunately, this theory doesn't hold up when the market is at a bottom and you are trying to deploy your investible cash. Dollar Cost Averaging Doesn't Work at the Bottom If you have pulled your money out of the stock market and are looking for the best way to re-deploy your money back into the stock market, dollar cost averaging will do more harm than good if the market is at the bottom. Let me illustrate with an example. Imagine you have $12,000 that you have pulled out of the stock market, and you are wondering when and how to put that money back into the stock market. You have read that using a dollar-cost-averaging method is a good way to go about it and want to explore what will happen if you do. Now, let's assume that the stock market is at a bottom—otherwise, you wouldn't want to be putting your money back in, would you? Let's also assume that the market is going to steadily climb during the next 12 months. Let's set up the example as follows: - You will invest in the SPY - You will invest $1,000 per month - You will buy as many shares as you can - We will assume the SPY will increase $5 per month Here's how it shapes up: MONTH | AMOUNT | PRICE | SHARES | 1 | $1,000 | $85 | 11.76 | 2 | $1,000 | $90 | 11.11 | 3 | $1,000 | $95 | 10.53 | 4 | $1,000 | $100 | 10.00 | 5 | $1,000 | $105 | 9.52 | 6 | $1,000 | $110 | 9.09 | 7 | $1,000 | $115 | 8.70 | 8 | $1,000 | $120 | 8.33 | 9 | $1,000 | $125 | 8.00 | 10 | $1,000 | $130 | 7.69 | 11 | $1,000 | $135 | 7.41 | 12 | $1,000 | $140 | 7.14 | | | | | | TOTAL | $12,000 | | 109.29 | | | | | | Average Price Per Share | $109.80 | | | | | | | Article continues on the next page... Page 1 | Page 2 | Video  To learn more, click here to watch the video on Dollar Cost Averaging at Support.
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