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A Guide To Dollar Cost Averaging

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November 29, 2020

A Guide To Dollar Cost Averaging

As the pandemic continues to rage, we have seen a roller coast ride in the stock market. Maybe you find yourself sitting on cash and are unsure when to get back into stocks. We know the old rule of buy low and sell high, yet even the most experienced investors find it almost impossible to time the market.

Investing at regular intervals may be one of the best ways to take advantage of downturns and market rallies. This investment technique is called Dollar Cost Averaging (DCA). With DCA, you invest a fixed dollar amount on a scheduled basis, regardless of the market direction. Using this strategy, you can reduce your average cost per share. This disciplined approach to investing can help long-term investors improve their chances for strong returns as well as build assets over time.

While no technique can assure a profit, DCA provides you with a simple strategy and you don't have to think about timing the markets just right.

By investing a fixed amount regularly, you end up buying more shares when prices are low and fewer shares when prices are high. The result is your average share cost could be less than the average share price.

Let's look at an example: If you invested $500 every month for six months during a period of fluctuating prices. As you can see from the hypothetical table we purchase a total of $3000 over 6 months. With DCA you take advantage of market rallies, while getting more shares for your money when the market turns down. In this example, your average share price is $9.20, but your average share cost is only $8.75 ($3000/342.5 shares).That means your cost was $0.45 per share less.

Amount Invested

Share Purchase Price

Shares Purchased

January

$500

$10

50

February

$500

$13

38.4

March

$500

$8.25

60.6

April

$500

$6.50

76.9

May

$500

$7.50

66.6

June

$500

$10

50

Total

$3000

$9.20

342.5

Dollar Cost Averaging only works if you use a disciplined approach of investing a fixed dollar amount on a regular basis. While DCA does not guarantee a profit, you will most likely fare better than investors who invest sporadically when they think the share price is low.

** The example is for illustrative purposes only and do not indicate past or future results of any security or investment.

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About the author

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Van Pappas

Vice President, Private CFO®

Van Pappas, CFP® - Van is a native of Atlanta. He holds his undergraduate degree in Finance with an emphasis in Real Estate. As a planner for 15 years, he earned his CFP designation from Kaplan University. He is currently the Chairman and founder of the Chamblee Chamber of Commerce and sits on the Downtown Development Authority for the City of Chamblee. In 2012, he noticed the value of helping the X-Y Generations and decided to merge his practice with oXYGen Financial.

Background and qualification information is available at FINRA's BrokerCheck website.

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