What is dollar-cost averaging?

investing 401 kimage credit: Good Search

What is dollar-cost averaging? Are you someone who wants to invest money, but doesn’t make a move until you’re “too late”—so, you don’t invest at all? If so, then maybe dollar-cost averaging is for you. It’s one option to get you saving.

Let’s say you have $5,000 available for investing. You could either invest it all one time and let it be, or, you could ease into the market over time in equal installments at regular intervals (every month, or every quarter.) The index price may move from $100 to $75 to $55 to $75 to $100. Let’s say you buy at $1,000 installments. You’ll buy more shares when the price is low, and fewer shares when the price is higher. You’ll have an average-cost per share $81. If you put the entire $5,000 in at one time, your average-cost per share is $100.

History favors putting in a lump sum of money because over the (very) long haul, markets have gone up.

However, with dollar-cost averaging, which is basically what you’re doing if you have a 401(k), or other employer sponsored retirement plan, if you put some of the money in at the wrong time, you’re bound to put some of the money in at the right time. If you put a lump sum in at the wrong time—it’s gone. With dollar-cost averaging, you’re buying stocks when they’re low. That goes against everything our emotions tell us to do. Buy more when prices are low, and buy less when prices go up. The advice, “Buy low, sell high” is fine until we’re sitting in the driver seat.

During the strongest markets, dollar-cost averaging came up short with 19.2 percent less wealth than lump-sum investing. During average or weak markets, dollar-cost averaging will cost you 3.6 percent of your holdings. However, the strategy of dollar-cost averaging may help you sleep at night rather than fearing you’ve dumped $5000 into a black hole. It minimizes regret.

How to Become Wealthy

Wealth has to do with consciousness, not just dollars in the bank. Some people have the dollars in the bank, and are still in debt, and unhappy. It’s basically the story of the tortoise and the hare. One puts aside as they go along, the other is living for today, saying things like, “I deserve it.”

Wealth has more to do with attitude and behaviors than actual numbers. (Sure, there’re those who have millions, but the I think if you click on the link below, you’ll find ways you can stress less about money, and see the light at the end of the tunnel.

the key to financial freedom is spending less than you earn over a long period of time. This is the way that people who’ve never earned more than $30,000 a year can retire rich (by following the principle) and how people earning $1 million a year can die broke (by not following it). That’s really good news for all of us because cutting expenses/living below your means is much easier and more controllable than trying to increase your income.

It’s Only Money . . .

True. Money doesn’t have any power on its own. Money is energy. We give money power with our talk and actions. If you want to save more, whether to get out of debt, stay out of debt, take a vacation, or have money put aside for whatever you chose in the future—here are a two really simple ideas:

  •  Instead of running to vending machines at work, try the alternative “desk food”. Fill little snack bags with nuts, raisins, carrots, a handful of chocolate chips, apple slices, grapes, a banana, or a hard boiled egg.
  •  You may say “It’s only five dollars for a video, or coffee,” but add that up. Pretty soon it’s $800.00—and that’s a flight to Europe or a year’s worth of car insurance. Where are your priorities?