Investment Tips

Dollar Cost Averaging—A Systematic Way to Pursue Growth

Some investment terms sound so complex that you may feel you need an economics degree to understand them. Dollar Cost Averaging (DCA) need not be one of them. In fact, DCA is a simple strategy that is at work in your retirement plan.*

DCA is a technique that involves investing the same dollar amount on a regular basis, regardless of market conditions. This strategy helps you buy more shares when prices are low and fewer when they are high. Over time, the result may be that the average cost you paid for your shares is lower than the average share price (see chart).

The table shows how the average cost paid per share over a six-month period may be less than the average price per share.

Average Cost: Total Invested $360 ÷ Total Shares Bought 39 = $9.23

Average Price: Total of Share Prices $60.50 ÷ Number of Months 6 = $10.08

The table shows how the average cost paid per share over a six-month period may be less than the average price per share.

* Periodic investment plans do not assure a profit or protect against loss in declining markets. This type of plan involves continuous investment in securities regardless of fluctuating price levels. Investors should consider their financial ability to continue purchases through periods of low price levels.

DCA and Your Plan

How does DCA work in your plan? When you and/or your employer contribute to your retirement savings plan, this is DCA -- the consistent investment made on a regular basis.

Ease Into It

DCA may also help you get into the practice of regular investing outside of your plan. So why not consider using it with other investments, such as a college fund and individual retirement accounts (IRAs)? Systematically investing smaller amounts of money in these types of accounts may help you manage the fear and the risks involved, as compared to investing one lump sum.

Avoid Bad Timing

An alternative to DCA is trying to “time the market”—or attempting to identify the right time to buy and sell investments. But even seasoned investors have a hard time predicting when the markets will rise and fall. Many investors who try to time the market end up doing the opposite—that is, chasing performance and buying high, then selling low when a fund doesn't perform well. Committing to a DCA investment strategy may help you avoid making these mistakes.

Stay Focused

DCA is about time in the market, not market timing. Time is an ally of long-term investors because it allows them to take full advantage of compounding—which is the potential ability of your investment to produce earnings that, in turn, produce earnings of their own. Over time, the result may be a snowball effect that helps your money grow. In addition, the longer you stay invested, the more time your investments have to ride out short-term dips in value. If you're using DCA, remember that a long-term focus is key.

From helping to lower your overall share cost to helping you maintain a long-term focus, dollar cost averaging is a simple strategy with many potential benefits. And in your retirement plan, DCA is automatic.

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