MONEY OBEDIENCE

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Remember, dollar cost averaging means you will invest a set amount of money on a regular basis. Let's say that you set the amount at $1000. Let's further assume that the first time, you invest $1000 in a stock that costs $10. You will buy 100 shares ($1000 divided by $10). Let's now assume that the price goes to $12.50 the next time you invest $1000. This time you will buy only 80 shares ($1000 divided by $12.50). If the stock price moves down sharply the next time you invest $1000, say to $8, you will buy 125 shares ($1000 divided by $8). At this point, your stock investment will not look so good. You will have invested $3000 (3 times $1000) and now you own 305 shares (100 + 80 + 125) that are worth only $2440 (305 times $8). But, as we said earlier, it is essential that you stick with your savings strategy, which means that you keep investing $1000 periodically.

Now let's now assume that the stock goes back up to $10. Remember - this is the price at which you started using this strategy. You still own 305 shares for which you paid $3000 in total. These 305 shares will now be worth $3050 at $10 each (305 times $10). You might have expected that your stock investment will be the same as your overall investments, i.e. $3000, since the stock price is at the same level as it was when you first invested in this stock. But, dollar cost averaging allowed you to buy more shares when the stock price was low, and fewer shares when the stock price was high. In this example, you profit even when the stock price is level over time because this strategy takes advantage of stock price movements in the interim. All you have to do to succeed with this kind of investing, or so the theory predicts, is stick with your savings strategy and put the same amount of money into your investment (in this example, stocks). This is especially important when the price is low and your previous stock purchases are worth less money than what you paid for them. You can dollar cost average with many kinds of investment vehicles (like stocks, bonds, index funds, and mutual funds). If you stick to the plan you made, chances are that things will work out well in the long run. Be aware that even with dollar cost averaging, persistent declines in the price of an investment will lead to losses.