Dollar Cost Averaging

What is Dollar Cost Averaging and How Can it Help You Invest Better?

Dollar cost averaging is an investment strategy that divides up an amount to be invested across periodic purchases. This strategy involves investing a fixed amount of money at regular intervals, regardless of the price of the asset at the time of purchase, resulting in buying more shares at a lower price when the market is down and fewer shares at a higher price when the market is up. Dollar Cost Averaging aims to reduce the risk that all your money will be invested at a market peak, also called timing risk. In a fluctuating market, the average cost per share is lower than the average price per share, which benefits the investor.

Example of Dollar Cost Averaging

Let see how this strategy works in simple terms. The example below demonstrates how an investor with $2,500 to invest could do so over 5 months using dollar cost averaging to their advantage.

Average cost per share¹ = $17.86
Average price per share² = $20

In this example, there was price fluctuation over the five-month period. March was the best time to buy ($10 per share) while February and May were the worst ($25 per share). Unfortunately, there’s no way to know when the perfect time to buy will be, but this strategy produced a lower cost per share ($17.86) than average price per share ($20.00).

How to use Dollar Cost Averaging

At One Day In July, we use this approach when a client is holding cash they want to get into the market but also wants to mitigate timing risk.

As fiduciary financial advisors, One Day In July doesn’t believe in individual stock picking or trying to time the market. Our approach is to build well-diversified portfolios of low-fee, tax-efficient, and highly liquid index funds across asset classes.

¹ Average cost per share is computed by dividing the total investment ($2,500) by the total number of shares purchased (140).
² Average price per share is computed by dividing the sum of the 5 purchase prices ($100) by the number of purchases (5).