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Dollar Cost Averaging: A Systematic Approach to Investing
Many investors find it difficult to continue to put money into the stock market during periods of high market volatility. Daily fluctuations in market prices can make it difficult for investors to decide when to buy. Often during periods of market volatility most investors find it more comforting to sit on the sidelines and wait for the “right time” to invest in the market. It is during periods of high market volatility when an investor may truly reap the benefits of dollar cost averaging.
What is Dollar Cost Averaging?
Dollar cost averaging is a technique that allows you to allocate a specific amount of money for investment at specific intervals. Because the same amount of money is being invested at regular intervals, timing investments to market performance is not a consideration. The same amount of money is invested when the market is up as when the market is down. When the prices are low, the dollar cost averaging strategy simply buys more shares than when prices are high.
Dollar Cost Averaging At Work
The following chart is a hypothetical illustration about a dollar cost averaging strategy that allocated $100 each month into the same investment over a period of six months in a fluctuating market.
| Date |
Investment Amount |
Share Price |
Shares Purchased |
Total Shares Owned |
| Month 1 |
$100 |
$10 |
10.00 |
10.00 |
| Month 2 |
$100 |
$8 |
12.50 |
22.50 |
| Month 3 |
$100 |
$5 |
20.00 |
42.50 |
| Month 4 |
$100 |
$10 |
10.00 |
52.50 |
| Month 5 |
$100 |
$16 |
6.25 |
58.75 |
| Month 6 |
$100 |
$10 |
10.00 |
68.75 |
| Total Amount Invested: |
$600 |
|
Average Price Per Share: |
$9.83 ($59/6 mths) |
| Account Value on Month 6: |
$687.50 |
|
Average Cost Per Share: |
$8.73 ($600/$68.75share) |
The chart above is a hypothetical example and is for illustrative purposes only. This data is not intended to represent the performance of any particular mutual fund. Please note that while the account in this illustration has gained value, a dollar cost averaging strategy does not guarantee a profit or protect you from a loss. Source: Investment Company Institute® (ICI)
Recommendation
Talk to your financial representative on how to implement a dollar cost averaging strategy through The RS Funds. Your financial advisor can help you evaluate the use of dollar cost averaging in the context of your investment portfolio, overall goals and risk tolerance.
Dollar cost averaging does not ensure profit or prevent loss. Since it does involve continuous investing regardless of market fluctuations, you should consider your financial ability to make purchases through periods of low and high price levels.
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