TheStockAdvisor Advice

Dollar Cost Averaging

Making a Little Go a Long Way
Sometimes, just reading the headlines can make one dizzy. One day the market is up 200 points, the next day its down 150. XYZ Corp. rose 15 points in one day, just to see it back down 14 the next. And so it goes, up and down, back and forth. Is it a bull market or a bear market? Should I be in or out? What is an investor to do? Especially one who does not have a large inheritance to speculate with, but who is trying to build a portfolio to provide for a comfortable retirement fund.

Remember, there are no guarantees in equity investing. The 100% sure winners are often, anything but. For many would be investors, the answer to "How do you make a small fortune in the stock market?" is "you start with a big one." There are a number of strategies that can be employed to try and smooth out the bumpy ride that Wall street can provide investors. One such widely followed technique is known as "dollar cost averaging."

This is not to suggest that such a strategy is in itself foolproof and a guarantee of financial success and profits . You still have to make wise stock selections and keep abreast of corporate developments to insure that the selection is still a bona fide long-term holding. What dollar cost averaging can accomplish, especially for the investor building a portfolio through periodic investments, is a convenient manner in which to increase holdings in specific stocks and to at the same time take advantage of market fluctuations.

Dollar cost averaging means making periodic investments of the same amount of money in the same stock regardless whether the price is declining or ascending. The drill, as with stop-loss orders, must be that the called for action is virtually automatic. The same dollar amount of investment will be made in the same security on the 15th of every month, or on the first day of every quarter or whatever interval is selected. The investment must be devoid of any consideration of the current stock price, if the investor wishes to maintain a program of dollar cost averaging.

Should the investor decide that there should be an opportunity for him to veto the investment at the time of purchase, then he is resorting to a different strategy known as "dollar cost finagling" and that is a separate topic.

As previously noted, dollar cost averaging is probably best suited to the investor who is starting to build a portfolio and does not have sufficient funds to purchase a meaningful number of shares in several companies. Through a periodic investment program, though, he can put a given amount each month in a list of companies and obtain the benefit of not only building a sizable investment fund over time, but also of obtaining a range of prices, some higher some lower, that would provide a lower average cost over time.

As with any other aspect of investing, there are no guarantees that this will produce cost benefits. Some studies that have been done on simple investment plans have not provided conclusive evidence and there are too many variables to simplify any in-depth analysis. However, there is evidence that for the investor that has the capital to make a significant one time investment in a company, there may be no benefit to dollar cost average the investment. However, for the small investor, the discipline demanded by dollar cost averaging may be the greatest benefit. And as in other aspects of life, discipline is essential for good behavior!


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