9/10/07
Contact:
Patricia Swanson, Human Development and Family Studies, (515) 294-2731,
pswanson@iastate.edu
Dollar Cost Averaging
Investors usually want to reduce their market risk and eliminate some of the guesswork of
deciding when to invest. One way of doing this is dollar cost averaging, according to Pat
Swanson, CFP® and families specialist with Iowa State University (ISU) Extension’s
Invest Wisely Project (www.extension.iastate.edu/investwisely).
“Instead of waiting to invest a single lump sum when you feel prices are at a low, with
this strategy you consistently invest smaller amounts over a longer period of time – for
example $100 every month,” Swanson explains.
“When prices are low, more shares are purchased and when prices are high, fewer shares
are purchased. While you may hesitate to buy more shares when the market is going
down, dollar cost averaging works best in this type of market. Over time the average cost
per share of the security may become less. This way you can accomplish the ‘buy low,
sell high’ goal of successful investing.”
The starting point is to decide how much you can invest each month or quarter.
“Consistency is the key with dollar cost averaging so make certain you are financially
able to invest the selected amount,” Swanson says. Select an investment that you want to
hold for 5 to 10 years or longer. The key to dollar cost averaging is to keep to your
schedule regardless of the price of the security.
Swanson says you may already be doing dollar cost averaging and not realize it. “If you
are investing a regular amount in a 401(k) or other employer retirement plan via payroll
deduction, you are already using dollar cost averaging.”
With other investing, you can also take advantage of automatic deductions by regularly
having contributions deducted from your bank account.
This method of investing has a few cautions, according to Swanson. The cost of
commissions to routinely purchase individual stocks may not make this approach
feasible.
This means no load mutual funds that charge no sales fees can be a good choice for dollar
cost averaging. Also, most mutual funds allow you to purchase fractions of shares.
With dollar cost averaging you still need to monitor your investments, Swanson says.
“Regularly, for example once a year, re-examine the stocks or mutual fund to see if they
are still a wise investment.”
The ISU Extension Invest Wisely Project provides a series of newspaper, radio, and web
resources for investors. It is funded by a grant from the Investor Protection Trust (IPT).
The IPT is a nonprofit organization devoted to investor education. Since 1993 the IPT
has worked with the States to provide the independent, objective investor education
needed by all Americans to make informed investment decisions.
www.investorprotection.org.
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