All about your money

Dollar Cost Averaging

Dollar cost averaging can be a great way to invest your money. For many of us it is the only way we have to build a nest egg. Also, dollar cost averaging fits right into our budget as we can treat it as a bill.

Consider that we bought $2400 shares of Ford in Jan of 2006. Here is what our investment looks like over a years time.

Now, lets take the same amount of money and buy shares over the same period of time.

You can see that we own about 33 more shares and our investment is worth about $250 more using the same amount of money.

Of course dollar cost averaging is not always the best way to buy stocks. Consider we buy $1000.00 of  Pfizer corporation on July 6th at $23.83 per share. Lets look at our investment over a six month period.

Now lets take that same $1000.00 and buy $200 a month worth of shares over the same 6 month period.

In this scenario we end up with about 4 less shares. If you look at this scenario you can see that our initial purchase price was the lowest, so dollar cost averaging is not the best scenario. Of course hindsight is always 20/20. In reality we really had no idea back in July which way of buying the stock was going to give us the best scenario.

So which way should you go? The answer to this is that it really depends. My personal belief is that you should take a portion of your monthly income and invest it. In doing this you will be dollar cost averaging. Since it is always a good idea to be as diversified as you can you may want to spend this money buying a mutual fund instead of a single stock. Many funds will let you buy in with a small initial investment if you invest a set amount each month. Check out our mutual funds page. It sports a couple of links to sites that can hook you up with a good mutual fund.