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Dollar Cost Averaging
Date Added: September 1st, 2005
Article provided by TeenAnalyst.com

   Are you worried about "jumping into" the market at the right time? With the use of an investment method called "dollar cost averaging", there is no need to worry.

   Dollar cost averaging is an investment method in which you put the same amount of money into an investment at regular intervals, such as every month. As the price of the investment rises and declines, you end up purchasing more shares when prices are low and less shares when prices are high. Using this method, there is no need to worry about timing the market.

   For example, suppose you invest $100 into the ABC Mutual Fund every month. With the fluctuating price of the investment, your history of monthly purchases may appear as follows:

1/20 10 shares @ $10/share
2/20 8 shares @ $12.25/share
3/20 8.5 shares @ $11.76/share
4/20 9 shares @ $11.11/share
5/20 10 shares @ $10/share
6/20 11 shares @ $9.09/share
7/20 14 shares @ $7.14/share
8/20 12 share @ $8.33/share
9/20 12.5 shares @ $8.00/share
10/20 11.11 shares @ $9.00/share
11/20 8.6 shares @ $11.63/share
12/20 6.44 shares @ $15.52/share

   At the end of the year, you would own 121.15 shares that were purchased at varying prices. As you can see, more shares were purchased when the NAV (Net Asset Value) was low and less shares were purchased when the NAV was high, paying on average $9.90 per share. Instead of worrying about timing the market (buying low, selling high), you would achieve a reasonable average cost per share. You also benefit from compounding by not hesitating to invest by timing the market. With the power of compounding and time on their side, any young investor would benefit from this method.

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