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Dollar Cost Averaging
Mutual funds offer an excellent method of investing that allows you to
invest relatively small dollar amounts into a fund each month. This kind of investing is known as dollar cost
averaging. Using this method an investor
would make a predetermined identical dollar amount investment on a regular basis, usually
each month. Using this investment strategy
allows the investor to purchase shares at a lower average cost per share in a fluctuating
market environment. However, dollar cost
averaging does not guarantee profits in a declining market because prices may continue to
decline for some time. The contributions can
be made by mailing in your contribution, or an automatic, electronic withdraw, from a
checking or savings account may also be available.
An Example of Dollar
Cost Averaging
Assuming that an investor has $25,000 to invest, the choices include: (1) buying a constant number of shares over the
course of each year until the full $25,000 is invested; (2) dollar cost averaging; i.e.,
buying a constant dollar amount of shares over the course of each year until fully
invested; (3) investing the total $25,000 in one transaction and becoming fully invested
the first year (not shown below).
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Constant
Shares |
Constant
Dollars |
| Year |
Price/sh |
Shares Purchased |
Dollars Spent |
Shares Purchased |
Dollars Spent |
| 1 |
50.00 |
100 |
$5,000 |
100 |
$5,000 |
| 2 |
25.00 |
100 |
$2,500 |
200 |
$5,000 |
| 3 |
37.50 |
100 |
$3,750 |
133 |
$5,000 |
| 4 |
62.50 |
100 |
$6,250 |
80 |
$5,000 |
| 5 |
75.00 |
100 |
$7,500 |
67 |
$5,000 |
| Totals |
500 |
$25,000 |
580 |
$25,000 |
| Portfolio Value after 5
years |
$37,000 |
$43,500 |
| Average Cost/Share |
50.00 |
43.10 |
*This example is for hypothetical illustration purposes only and does not
imply any guarantee of performance or protection from losing value.
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