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Dollar cost averaging is a
strategy that lessens the risk of investing a large amount in a single
investment or portfolio at the wrong time. It is especially worth considering
when markets are volatile. This recent blog post by precious metal experts
APMEX explains the fundamentals of dollar cost averaging as a way to avoid
mistiming your entry into the market.
“When investing in gold,
it’s only natural to think in terms of cost per ounce. Many people see
the price of gold and decide to jump in. They make a one-time investment, and
wait for gold prices to go up. While gold has indeed trended up throughout
2011, there is a natural fluctuation in pricing. It goes up and then down and
then up again.
There’s a way of using the
fluctuating price of gold to your advantage and it’s called dollar cost
averaging. Instead of making a single investment, you invest a fixed amount
on a fixed schedule.
Here’s an illustration of
how it might work. Say an investor has $12,000 to invest, so using dollar
cost averaging they decide to invest $1000 per month in Stock ABC. The first
month Stock ABC sells for $50 per share, so the investor purchases 20 shares.
The second month Stock ABC is $25 per share, so the $1000 can purchase 40
shares. The third month, stock ABC is up to $40, so they can purchase 25
shares. All together, they now own 85 shares of Stock ABC at the average per
share price of $35.29.
If this investor had spent the
entire $12,000 up front they would have paid $50 per share, but by dollar
cost averaging after three months, they only paid $35.29 per share. If
investments only went up, this would not be an advisable way to invest, but
in a market environment where there has been a great deal of volatility like
we have seen in 2011, dollar cost averaging will help reduce risk.
Dollar cost averaging is an
especially prudent investment strategy for gold and silver. Make a commitment
to how much you can spend on a weekly, monthly or quarterly basis and then
simply follow through. We have all heard the adage that you cannot time the
markets. Dollar cost averaging accepts this as truth and gives an investor a
simple plan to follow.”
This article courtesy of APMEX.
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