Dollar Cost Averaging Demystified
Want to reduce the pressure of timing your investments? Find out how dollar cost averaging could help.
Right!
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The “Trial Run” Challenge
Before you use dollar cost averaging as an investment strategy, do a three-month fake trial to see how it works. First, decide how much you want to “invest” and in what increments. Then, find a stock, mutual fund or other investment you like and choose a day to “invest”. Make a note of the total amount as well as the smaller increment you want to invest, and the purchase price on the day you begin. A month later, you can track how the stock has performed and put your next increment down. After three months of pretend investing, compare your return for your dollar cost averaging trial to your return if you invested in one big sum. This should give you a general feel for how dollar cost averaging works.
Session Q & A
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To reduce the stress of timing your investment purchases and help make larger investments less risky by reducing risk that declining financial markets will take a huge chunk out of your portfolio.
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It is a gradual-in, gradual-out strategy. Instead of investing everything at once, your investment is divided into small increments over an entire year, at a certain amount per month. This means your investment is exposed to less upside as well as downside risk.
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The size of the return may not be as high as it would be if you were to invest all at once at the lowest point price; however, this strategy could help you avoid the pressure of timing it perfectly.
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1. How much to invest 2. What increments to invest 3. Length of time you want to distribute your investments
David DeJong, PhD
David is a Professor of Economics at the University of Pittsburgh and serves as Vice Provost for Academic Planning and Resources Management. With a PhD from the University of Iowa, he also served as a Visiting Professor in Vienna, Buenos Aires and Kiel, Germany. In 20+ years as a professor, he has written over 40 leading journal articles, coauthored the textbook Structural Macroeconomics, 2nd Ed., and was Associate Editor of the Journal of Business and Economic Statistics. Proud husband, father and manager of a struggling fantasy football team, David is a lousy golfer but an avid sports fan.
David is a Professor of Economics at the University of Pittsburgh and serves as Vice Provost for Academic Planning and Resources Management. With a PhD from the University of Iowa, he also served as a Visiting Professor in Vienna, Buenos Aires and Kiel, Germany. In 20+ years as a professor, he has written over 40 leading journal articles, coauthored the textbook Structural Macroeconomics, 2nd Ed., and was Associate Editor of the Journal of Business and Economic Statistics. Proud husband, father and manager of a struggling fantasy football team, David is a lousy golfer but an avid sports fan.
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