Dollar Cost Averaging

By | October 31, 2005

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 thoughts on “Dollar Cost Averaging

  1. Mathieu Guerville

    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%

    Reply
  2. Smarty

    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.

    Reply
  3. Loi Tran

    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.

    Reply

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