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The concept of the periodic purchase securities to reduce the average purchase price as the securities fluctuate over time. Dollar cost averaging plays a vital roll in the wealth building process. Do you scan the Sunday newspaper for items on sale? Do you read or hear about advertised sales and check them out or make a purchase? We generally try to find the best deals, especially when we are purchasing major items such as autos, homes, or large appliances. Unfortunately, when it comes to investing in the market we tend to buy when the market is strong and become nervous and sell when the market is week. If you are a long term investor you can take advantage of down cycles to purchase your securities on sale, thus purchasing more shares at a lower prices as the market moves down and fewer shares at higher prices as the market moves up. This concept is known as dollar cost averaging and is a great strategy used by investors to reach their financial goals and retire sensibly. There are many books available about sound investment strategies. When an employee purchases securities through a payroll savings plan he is actually practicing the concept of dollar cost averaging. For example, in month one a one hundred investment at seven dollars fourteen cents per share results in the purchase of fourteen shares. In month two the one hundred dollar investment results in the purchase of twenty shares, etc. Month Contribution Cost per share Shares Purchased 1 100.00 7.14 14 2 100.00 5.00 20 3 100.00 5.88 17 4 100.00 9.09 11 5 100.00 6.67 15 6 100.00 7.69 13 7 100.00 5.88 17 8 100.00 6.67 15 9 100.00 8.33 12 10 100.00 5.56 18 11 100.00 6.25 16 12 100.00 7.14 14 Totals 1200.00 182 Average Cost Per Share 6.59 Actual Share Price in 12th Month 7.14 After twelve months the employee has purchased one hundred eighty two shares for an average price per share of six dollars fifty nine cents. In this example the strategy of dollar cost averaging has produced some positive Results. The actual value of the one hundred eighty two shares at seven dollars fourteen cents is twelve hundred ninety nine dollars forty eight cents, resulting in an eight percent capital gain in spite of the fact that the security was the same price in the twelfth month as it was when the he made the first month’s purchase. The market swings up and down over time. The consensus in the investment community is that individual investors should take advantage of dollar cost averaging to lower the average cost per share. This strategy not only could increase profits but could reduce losses incurred if the investor should have to sell his securities in a weak market. Free 30 Day Trial of the Market Watch's Newsletter In the case of an inheritance, or the transfer of large sums of money to a variable mutual fund or other variable security it is wise to use the concept of dollar cost averaging. Account managers will generally recommend that the investor invest a small amount in a variable securities fund and invest the balance in a money market fund. He will then recommend a schedule for the transfer of funds to the variable fund in increments over a long period of time. Generally, the transfer of funds will be completed within twelve months either in quarterly of monthly increments. We cannot overemphasize the importance of dollar cost averaging when it comes to your long range savings planning. Remember, a penny saved is a penny earned. Look at it this way. Continue to buy when the market is on sale saving those pennies and earning more in the long run.
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