Deborah A. Williams, CFP
Are
you wondering whether it's the right time to
invest in the stock market? Stop wondering.
With dollar cost averaging, it's always the
right time.
Dollar cost
averaging is a systematic investment
strategy that makes it simple and affordable
to invest a specific dollar amount, at
regular intervals, for whatever length of
time you decide. With dollar cost averaging,
you automatically purchase more shares when
prices are low and fewer shares when prices
are high, thus achieving a favorable average
cost per share. Here's how it works:
In the following
example, we assume an investor purchases an
investment on a monthly basis, using the
same amount of money ($200) each time.
|
Month |
Price
Per Share |
Shares
Purchased |
Amount
Invested |
|
December |
$32 |
6.25 |
$200 |
|
January |
$28 |
7.14 |
$200 |
|
February |
$25 |
8.00 |
$200 |
|
March |
$31 |
6.45 |
$200 |
|
April |
$34 |
5.88 |
$200 |
|
May |
$40 |
5.00 |
$200 |
|
|
Total |
$190 |
38.72 |
$1200 |
- Average
price per share: $190 ÷ 6 = $31.67
- Average cost per
share: $1200 ÷ 38.72 = $30.99
As you can see, the
price per share of the investment was highly
volatile-ranging from a high of $40 per
share in May to a low of $25 per share in
February-which resulted in an average price
per share of $31.67; however, because the
investor continued to systematically invest
the same dollar amount each month, the
average cost per share was only $30.99.
What does this mean
for you? Ultimately, that this time tested
strategy can help you make the most of
market fluctuations thus avoiding the need
to ask: Is this the right time to invest?
Please note: Dollar
cost averaging does not assure a profit and
does not protect against loss in declining
markets. Additionally, as such a plan
involves continuous investment in securities
regardless of fluctuating price levels,
investors should consider their financial
ability to continue purchases through
periods of low price levels.
Deborah A. Williams
is a Financial Advisor and Certified
Financial Planner at Legg Mason Wood Walker,
Inc., a securities brokerage and financial
services firm and member of the New York
Stock Exchange, Inc. and SIPC.
Ms. Williams has
over ten years of financial services
industry experience. She is a licensed
investment and insurance professional. Ms.
Williams earned her bachelor's degree from
the University of Maryland at College Park.
Additionally, she has earned her Certified
Financial Planner TM designation. Active in
her community of Taneytown, MD., Ms.
Williams volunteers her time with Rape
Crisis Intervention Services.
