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Dollar Cost Averaging
You may have heard it said that investment success results from time in the market, not timing
the market. While buying low and selling high is ideal, it is nearly impossible to predict exactly
when the market will rise or fall. That's why many long-term investors utilize dollar cost averaging,
the practice of investing a set amount of money in the same investment at regular intervals.
Dollar cost averaging helps to minimize the effect of market volatility on an investment portfolio
and is widely accepted as a sound long-term investment strategy in both rising and falling
markets. With dollar cost averaging, you may buy low or high. When prices are low, your
investment will purchase more shares--shares that can grow in value when the market recovers.
Of course when prices rise, fewer shares will be purchased. But over time, the average amount
paid for each share (average cost per share) will usually be less than the average price per share.
Since dollar cost averaging requires identical investments to be made at pre-determined times,
the strategy eliminates the decision of when to invest. Also, by developing a regular schedule for
investment contributions, you are more likely to stick to the discipline for your investment plan.
Dollar cost averaging enable you to begin a savings program with a series of small
contributions. The strategy is best suited to long-term investors with the fortitude to keep
investing when the market falls and to resist selling when the market rises. Dollar cost averaging
does not ensure a profit, nor does it protect from loss during declining markets. Investors should
consider their ability to purchase shares continuously during periods of falling share prices.
How Does Dollar Cost Averaging Work in a Declining Market?*
Let's say you decide to make a monthly investment of $400 for a period of six months. During that
time, share prices are falling: $20, $18, $18, $15, $14, $14. At the end of six months, you have
invested $2400 and you own 148.24 shares. While the average price per share is $16.50, your
average cost per share is only $16.19.
Now that may not seem like such good news considering the current price per share is $14. But
if you had invested the entire $2400 in the first month of your investing program, you would have
fared worse. You would have purchased on 120 shares and the value of your account at the end
of the six month period would be only $1680, $395.36 less than the current value under this
scenario. By dollar cost averaging, you own more shares and the average cost of each share is
usually less than the average price per share.
How Does Dollar cost Averaging Work in a Rising Market?*
Once again, we'll assume a monthly investment of $400 for six months. This time, share prices
are rising and you buy shares at: $15, $17, $20, $20, $23 and $25. At the end of the six month
period you own 123.58 shares and your average cost per share is $19.42--58 cents less than the
average price per share ($20).
beginning of the six month period when prices were at the lowest level. But could you have
predicted precisely when to invest? And would you have known with absolute certainty that the
investment would experience a steady rise during the next six months? Probably not. By dollar
cost averaging, you can spread the risk of investing in a volatile market without worrying about the
timing of your purchases.
*These are hypothetical examples only and are not indicative of the performance of any particular investment.
Before investing in a mutual fund, consider its investment objectives, risks, charges and expenses carefully.
You may have heard it said that investment success results from time in the market, not timing
the market. While buying low and selling high is ideal, it is nearly impossible to predict exactly
when the market will rise or fall. That's why many long-term investors utilize dollar cost averaging,
the practice of investing a set amount of money in the same investment at regular intervals.
Dollar cost averaging helps to minimize the effect of market volatility on an investment portfolio
and is widely accepted as a sound long-term investment strategy in both rising and falling
markets. With dollar cost averaging, you may buy low or high. When prices are low, your
investment will purchase more shares--shares that can grow in value when the market recovers.
Of course when prices rise, fewer shares will be purchased. But over time, the average amount
paid for each share (average cost per share) will usually be less than the average price per share.
Since dollar cost averaging requires identical investments to be made at pre-determined times,
the strategy eliminates the decision of when to invest. Also, by developing a regular schedule for
investment contributions, you are more likely to stick to the discipline for your investment plan.
Dollar cost averaging enable you to begin a savings program with a series of small
contributions. The strategy is best suited to long-term investors with the fortitude to keep
investing when the market falls and to resist selling when the market rises. Dollar cost averaging
does not ensure a profit, nor does it protect from loss during declining markets. Investors should
consider their ability to purchase shares continuously during periods of falling share prices.
How Does Dollar Cost Averaging Work in a Declining Market?*
Let's say you decide to make a monthly investment of $400 for a period of six months. During that
time, share prices are falling: $20, $18, $18, $15, $14, $14. At the end of six months, you have
invested $2400 and you own 148.24 shares. While the average price per share is $16.50, your
average cost per share is only $16.19.
- Investing $400 Each Month in a Falling Market
Month Price Shares
Bought Investment Per Share Purchased
1 $400 $20 20.00
2 $400 $18 22.22
3 $400 $18 22.22
4 $400 $15 26.66
5 $400 $14 28.57
6 $400 $14 28.57
Totals: $2400 $16.50 (avg) 148.24
Average cost per share: $16.19
(Total investment divided by number of shares bought)
____________________________________________
Average price per share: $16.50
(Sum of share price divided by the number of contributions)
Now that may not seem like such good news considering the current price per share is $14. But
if you had invested the entire $2400 in the first month of your investing program, you would have
fared worse. You would have purchased on 120 shares and the value of your account at the end
of the six month period would be only $1680, $395.36 less than the current value under this
scenario. By dollar cost averaging, you own more shares and the average cost of each share is
usually less than the average price per share.
How Does Dollar cost Averaging Work in a Rising Market?*
Once again, we'll assume a monthly investment of $400 for six months. This time, share prices
are rising and you buy shares at: $15, $17, $20, $20, $23 and $25. At the end of the six month
period you own 123.58 shares and your average cost per share is $19.42--58 cents less than the
average price per share ($20).
- Investing $400 Each Month in a Rising Market
Month Price Shares
Bought Investment Per Share Purchased
1 $400 $15 26.66
2 $400 $17 23.53
3 $400 $20 20.00
4 $400 $20 20.00
5 $400 $23 17.39
6 $400 $25 16.00
Totals: $2400 $20 (avg) 123.58
Average cost per share: $19.42
(Total investment divided by number of shares bought)
____________________________________________
Average price per share: $20.00
(Sum of share price divided by the number of contributions)
beginning of the six month period when prices were at the lowest level. But could you have
predicted precisely when to invest? And would you have known with absolute certainty that the
investment would experience a steady rise during the next six months? Probably not. By dollar
cost averaging, you can spread the risk of investing in a volatile market without worrying about the
timing of your purchases.
*These are hypothetical examples only and are not indicative of the performance of any particular investment.
Before investing in a mutual fund, consider its investment objectives, risks, charges and expenses carefully.
Securities offered through NEXT Financial Group, Inc. member FINRA and SIPC 2500 Wilcrest, Suite 620,
Houston TX 77042 (877) 876-6398, www.nextfinancial.com
Before investing in a mutual fund or variable annuity, consider its investment objectives, risks, charges and
expenses carefully.
_______________________________________________________________________________
Copyright 2008 McMillion Financial Group LLC. All rights reserved. Revised May 5, 2008.
______________________________________________________________________________
Houston TX 77042 (877) 876-6398, www.nextfinancial.com
Before investing in a mutual fund or variable annuity, consider its investment objectives, risks, charges and
expenses carefully.
_______________________________________________________________________________
Copyright 2008 McMillion Financial Group LLC. All rights reserved. Revised May 5, 2008.
______________________________________________________________________________
Branch Office: 3022 S National Avenue, Suite 326, Springfield MO 65804
Phone (417) 889-9003 E-mail: kmcmillion@mcmillionfinancialgroup.com
McMillion Financial Group LLC is not an affiliate of Next Financial Group LLC.
Phone (417) 889-9003 E-mail: kmcmillion@mcmillionfinancialgroup.com
McMillion Financial Group LLC is not an affiliate of Next Financial Group LLC.
