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A simple example of dollar cost averaging

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This is a simple example of how dollar cost averaging works. For just 5 investment sums spread over 5 different fixed time randomly in 3 different types of markets (bull, bear and indifferent), this simple example shows the effectiveness of using the dollar cost averaging method for investment. For all three types of markets, the average cost of each share or units bought is below the average price.


This means that if you separate your purchases over 5 different periods, the average unit price that you bought your share at is likely to be less than the average price over the period being observed. This is significant because if your broker/remiser/ or financial advisor tells you that he or she can buy shares or unit trust at the lowest price, they are bluffing you because on average over time, the probability is that they will be buying at the average price. Sometimes, they will buy at high prices, other times, they will be buying at low prices but on average they will be buying at the average price. No one can time the market, unless they have insider news.


This means that it is better to stay invested at fixed times all the time, which is what dollar cost averaging is, rather than to wait for an opportunity to buy at the lowest price which is impossible to do ALL the time.

HOW DOLLAR-COST AVERAGING WORKS

$500 INVESTED REGULARLY FOR 5 PERIODS
(Price trends chosen are for illustrative purposes only.
Different trends will result in different average costs. )


MARKET TREND

UP

DOWN

MIXED

INVESTMENT ($)

SHARE
PRICE ($)

SHARES
BOUGHT

SHARE
PRICE ($)

SHARES
BOUGHT

SHARE
PRICE ($)

SHARES
BOUGHT

500

10.00

50

10.00

50

10.00

50

500

9.25

54.05

10.50

47.62

11.00

45.46

500

8.75

57.14

11.25

44.44

9.00

55.56

500

8.25

60.61

11.75

42.55

11.00

45.46

500

8.00

62.5

12.00

41.67

10.00

50

2,500

44.25***

284.3

55.50***

226.28

51.00***

246.48


AVG.COST: $8.79*
AVG.PRICE: $8.85**

AVG.COST: $11.05*
AVG.PRICE: $11.10**

AVG.COST: $10.14*
AVG.PRICE: $10.20**

* AVERAGE COST IS THE TOTAL AMOUNT INVESTED DIVIDED BY SHARES PURCHASED.
** AVERAGE PRICE IS THE SUM OF THE PRICES PAID DIVIDED BY NUMBER OF PURCHASES.
***CUMULATIVE TOTAL OF SHARES PRICES USED TO COMPUTE AVERAGE PRICE.

Source : Citibank N.A.

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Disclaimer

The information contained in this blog is prepared from data believed to be correct and reliable at the time of publication of this report. The authors do not make any guarantee or representation as to the adequacy, accuracy, completeness, reliability of the information contained herein. Neither the authors or any affiliates or related persons shall be liable for any consequences (direct or indirect losses, loss of profits and damages) of any
reliance placed on information provided in the blog.

Shares and financial instruments illustrated in this blog can go down sharply or in certain instruments suffer total loss on the initial investments. Investors are advised to make their own judgment on the information provided and consult their own financial advisors or consultants as to the suitability of the products illustrated to their particular financial needs and objectives before acting on any information contained herein in this blog.