30 Oct Dollar Cost Averaging
What is Dollar Cost Averaging?
Dollar cost averaging is the practice of investing a fixed dollar amount into an investment account at set intervals, such as weekly or monthly, regardless of market activity. The dollar value invested each period will remain the same but the number of shares purchased will vary based upon the fluctuating prices of the shares purchased.
What is the Purpose of Dollar Cost Averaging?
The purpose of dollar cost averaging is to mitigate the risk of investing a large lump sum of money when prices are inflated, and thus poised to fall. Rather with dollar cost averaging, the investor will setup a deposit plan which can offer the potential to pay a lower cost for shares. By investing a fixed amount regularly, the investor will purchase fewer shares at higher prices and more shares at lower prices. Over time, the cost of each share will be lower than the average price. Below is an example:
|Period||Dollar value invested||Price per share||Shares purchased|
|Average cost per share over the seven weeks||$5.75|
|Average price per share over the seven weeks||$6.00|
Note how the average cost per share (or price paid by the investor) is lower than the average price of the shares over the same seven weeks. The difference in the cost per share vs. the actual price per share is due to the fact that the investor purchases less shares at higher prices and more shares at lower prices.
However, note that the price per share did not continuously rise. In a rising market, the strategy of dollar cost averaging will perform worse than simply investing a lump sum at the beginning since the investor will be missing out on market gains while their money is not in the market.
Benefits of Dollar Cost Averaging
- Diversifies your purchase price, which makes you less susceptible to the disposition effect
- Reduces the emotional component: reduces your anxiety that you have bought “at the top”
- Provides concrete plan of moving out of cash. The move from cash to the stock market can be an uncomfortable move. Dollar cost averaging can help lower the discomfort
Dollar cost averaging has both advantages and disadvantages, with some of the primary advantages being psychological where the investor need not worry about investing everything at a market top. Dollar cost averaging will smooth out the price fluctuations overtime and can help an investor accept market downturns, since they will benefit from their fixed dollar amount buying more shares. Dollar cost averaging is simply another tool for the investor to utilize when managing their investments and liquid assets.
Dollar Cost Averaging at MyRoboAdviser™
MyRoboAdviser™ makes it simple and inexpensive to practice dollar cost averaging. In order to setup a dollar cost averaging strategy, simply setup an automatic deposit in your MyRoboAdviser™ account. This is extremely easy to do and we recommend doing it since auto-deposit saves you time and eliminates the emotional aspect of investing. To turn on auto-deposit, log into your account, click the account you’d like to turn on auto-deposit for, click “setup auto-deposit”, and then choose the dollar value for each transaction as well as the day(s) of the month you’d like the deposit to be made. Dollar cost averaging at MyRoboAdviser™ is inexpensive since there are no commissions. Betterment, MyRoboAdviser’s custodian and technological partner, does not charge a transaction fee when you make a deposit into your account. The no transaction cost model can be a benefit for investors practicing dollar cost averaging since transaction costs can take a large bite out of investment returns. Rather, MyRoboAdviser™ charges an asset based fee. Thus, your cost of investing is based upon your total dollar value in your account as opposed to the number of transactions you make.
If you have any questions about holdings in your account or one of our models, or perhaps have another question about our services, you can contact us directly at 920.785.6012 or email us at email@example.com. MyRoboAdviser™ has partnered with Betterment for Advisors as our technology solution to provide our services to our clients. Betterment maintains a support line you can also call for help with navigation, linking your accounts or other site functionality. You can call the Betterment for Advisors support line at 800.400.1571.
Last updated, October 30, 2018
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