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Dollar Cost Averaging

This post is my own self published article in 2010. This article may be 8 years old but it is very relevant. Please enjoy:

Dollar cost averaging: This is a strategy to minimize the risk of overpaying a certain amount of stock/equity/ETF's. Time horizon and amount of investing is usually based on the investor and/or adviser/broker (Brokers will sell for a commission, be careful!). What makes this a strategy is by simply investing the same amount of value (lets say $1000/month as an example) and disregarding the price of the stock.

There are many complex calculations on the formula. For short term purposes and simplicity: add all the prices together and divide them by the amount of times you have purchased the stock. For example: You purchased ABC stock at 80, then at 60, then at 65. Add them up you will get 205, now divide it by 3 (transactions happened 3 times) = The price of the Dollar cost averaging will be 68.33 per share! So that one time you purchased at 80 will be actually lower since you have been investing it for some time. Now obviously the lower the price, the more shares you will purchase. This increases your portfolio value and is an excellent way to build a small percent of a particular investment that you have been meaning to increase. There is a separate formula to know the percentage but that really is irrelevant since the main idea is for the price per share.

Personal Opinion: I love dollar cost averaging. You just need to be sure which particular investment(s) that is ideal for you to use this strategy, such as ETF's (it is diversified). You also need to have an exit plan of that investment (such as after x amount of time or percentage gained). This is what separates the average investor that losses in the market with a professional investor that makes money.

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