Better Than Average
(Dollar-Cost Average)

The steady plodding approach has dramatic results when Dollar-Cost Averaging is used

The concept is simple, yet very few investors use it. A big fear for an investor is that he or she will enter the market at what will turn out to be the worst time to invest. That is, when the price of the stock is high compared with where it drops to after that purchase! It seems reasonable to prefer to have bought at the stock’s average price, instead of that inflated price. Well, dollar-cost averaging does more than that. By investing based on a dollar-cost averaging strategy, your cost will be substantially less than the average cost! That’s because you will buy more shares when the stock is selling at lower prices and fewer shares when it is selling for higher prices.

Perhaps the following examples will convince you that your results can be dramatically improved if you buy stocks on a dollar-cost averaging basis. Once more, this technique is only appropriate for those who invest with a long-term outlook (five years at a minimum). It will not (especially in a down trend market) produce results for traders looking for a fast buck.

Here's how dollar-cost averaging would work assuming you are investing in a stock that has a no fee dividend reinvestment plan. (If the stock does not have a dividend reinvestment plan, or charges fees with the plan, commission costs will be another factor to consider.)

First, you must commit yourself to invest a fixed dollar amount on every purchase date, even though you certainly have no obligation to the plan to do so. To keep the math simple, we'll use $100.00 as our quarterly investment amount. (Most DRIP's have a $25.00 minimum investment, but you may send in higher amounts, up to thousands of dollars, in many cases.) We have assumed four market prices for the illustration below--$12, $9, $30, and $35. The average market price is $21.50. Our $400 investment bought 25.6345 over the four quarters. The average cost of those 25.6345 shares is $15.60.

In this simple illustration, you can see that regardless of market conditions, your cost per share will be even lower than the average price of the shares during the period you are investing. Another advantage is that you will benefit from the fact that your dividends are being invested on this basis. Your cost per share will be reduced even further since shares are automatically purchased with reinvested dividends. You don't have to be a math genius to see how quickly your holdings will multiply with dollar-cost averaging.

To make good on your desire to make this technique work, here's a simple solution. Instruct the agent to make auto deductions from your bank to fund your DRIP account. However, if the company does not offer this option, address 4 envelopes (or 12 envelopes if you want to invest monthly) to each DRP agent. Put the envelopes on top of your stack of bills. Pay these obligations (to yourself) first. While many investors can't seem to master even the "buy low and sell high" concept, those who have the self-discipline to buy a fixed dollar amount on a regular basis regardless of market conditions will end up with substantial positions acquired at a variety of price points. More shares will have been bought at the lower prices.