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Monday, October 31, 2005

Dollar Cost Averaging

I was reading Poe's post about Dollar Cost Averaging and was playing around with the numbers. I realized that the shorter the time frame for your automatic investments (assuming same total monthly contributions) the better your dollar-cost-averaging affects are. Here's my example. SEMI-MONTHLY PLAN Month Price Amount Shares Jan $10 $20.00 2.000 Jan $8 $20.00 2.500 Feb $9 $20.00 2.222 Feb $7 $20.00 2.857 Mar $9 $20.00 2.222 Mar $10 $20.00 2.000 Apr $11 $20.00 1.818 Apr $10 $20.00 2.000 Total Amount: $160.00 Total Shares: 17.620 Average Price/Share: $9.08 SEMI-MONTHLY PLAN Month Price Amount Shares Jan $10 $40.00 4.000 Jan Feb $9 $40.00 4.444 Feb Mar $9 $40.00 4.444 Mar Apr $11 $40.00 3.636 Apr Total Amount: $160.00 Total Shares: 16.525 Average Price/Share: $9.68 One interesting factor I noticed is that the average price/share remains the same regardless of the amount you contribute regularly in both of the plans. That makes sense, because if you increase the regular contributions the number of shares you buy increases proportionally for the same price.

4 Comments:

At 11/02/2005 12:35:00 PM, Blogger Belasarius said...

Hi,

This is something I've been thinking about also. I've posted my idea of how and why this works if you're interested:

http://rationalfinance.blogspot.com/

 
At 11/18/2005 04:35:00 PM, Blogger Mathieu said...

The issue with dollar cost averaging is that you pay trade fees all the time, my broker (izone) charge $5 per trade, so buying 10 shares 10 times cost me $45 dollars out of a total of 100 shares, which is 45c per share to add to the dollar cost averaged price.

I prefer buying large chunks of stocks so that my commissions are less than 1%

 
At 11/18/2005 06:14:00 PM, Blogger Smarty said...

Mathieu,

Dollar cost averaging may not make sense if you're paying trading fees. It's really meant for 401k plans or direct mutual fund contributions where you don't pay a transaction fee.

 
At 11/28/2005 07:22:00 PM, Blogger Loi Tran said...

Dollar Cost Average is will make you more money on a fluctuating market. You will make more money in a rising market with a lump sum investment. If fees are involved, I'd rather invest in a lump sum. If I have the funds available to invest, I would invest lump sum because the market will generally go up more than it will go down. I'd DCA if I am constantly investing in a mutual fund with no fees.

 

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