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Saturday, April 11, 2009

Investment Strategy Dollar Cost Averaging

From the Hoss's Mouth


What is dollar cost averaging? Hoss Cents Free Financial Money Magazine defines dollar cost averaging as the technique of investing a fixed amount of money on a predetermined schedule regardless of the per unit or share price. Dollar cost averaging can be a very effective investment strategy, especially if you are prepared to make regular investments over a long period of time.


If you are a regular reader of Hoss Cents Free Financial Money Magazine you will have already read his post beginner investing which suggests what steps should be taken before you start an investment program.

Now, for a look at how dollar coast averaging works as an investment strategy...




In each of the three scenarios below our fixed investment amount is $100, and our predetermined schedule is on the first of each month.

Investment Scenario One: Per unit price continually increases.

Month

Invested

Cost

Units

Total Units

Invested

Value

Profit

Jan

$100

$10.00

10

10

100

$100.00

$0.00

Feb

$100

$11.00

9.09

19.09

$200.00

$210.00

$10.00

March

$100

$12.00

8.33

27.42

$300.00

$329.09

$29.09

April

$100

$13.00

7.69

35.12

$400.00

$456.52

$56.52

May

$100

$14.00

7.14

42.26

$500.00

$591.63

$91.63

June

$100

$15.00

6.67

48.93

$600.00

$733.89

$133.89

July

$100

$16.00

6.25

55.18

$700.00

$882.82

$182.82

Aug

$100

$17.00

5.88

61.06

$800.00

$1,037.99

$237.99

Sept

$100

$18.00

5.56

66.61

$900.00

$1,199.05

$299.05

Oct

$100

$19.00

5.26

71.88

$1,000.00

$1,365.67

$365.67

Nov

$100

$20.00

5

76.88

$1,100.00

$1,537.54

$437.54

Dec

$100

$21.00

4.76

81.64

$1,200.00

$1,714.42

$514.42

Due to the constant increase in per unit cost, the number of units purchased each month declines (10 in the first month, 4.76 in the last) . At the end of the 12 months your investments are worth $1714.42, an increase of $514.42 over your purchase price, which is a profit of 42.86%.


Investment Scenario Two: Per unit price declines for the first five months and then increases for the next five months.

Month

Invested

Cost

Units

Total Units

Invested

Value

Profit

Jan

$100

$10.00

10

10

100

$100.00

$0.00

Feb

$100

$9.00

11.11

21.11

$200.00

$190.00

($10.00)

March

$100

$8.00

12.5

33.61

$300.00

$268.89

($31.11)

April

$100

$7.00

14.29

47.9

$400.00

$335.28

($64.72)

May

$100

$6.00

16.67

64.56

$500.00

$387.38

($112.62)

June

$100

$5.00

20

84.56

$600.00

$422.82

($177.18)

July

$100

$6.00

16.67

101.23

$700.00

$607.38

($92.62)

Aug

$100

$7.00

14.29

115.52

$800.00

$808.61

$8.61

Sept

$100

$8.00

12.5

128.02

$900.00

$1,024.13

$124.13

Oct

$100

$9.00

11.11

139.13

$1,000.00

$1,252.14

$252.14

Nov

$100

$10.00

10

149.13

$1,100.00

$1,491.27

$391.27

Dec

$100

$10.00

10

159.13

$1,200.00

$1,591.27

$391.27

Here your profit would be $391.27 (32.6%) and have a total of 159.13 units.


Investment Scenario Three: The per unit price fluctuates over the 12 month period.

Month

Invested

Cost

Units

Total Units

Invested

Value

Profit

Jan

$100

$10.00

10

10

100

$100.00

$0.00

Feb

$100

$12.00

8.33

18.33

$200.00

$220.00

$20.00

March

$100

$11.00

9.09

27.42

$300.00

$301.67

$1.67

April

$100

$13.00

7.69

35.12

$400.00

$456.52

$56.52

May

$100

$12.00

8.33

43.45

$500.00

$521.40

$21.40

June

$100

$14.00

7.14

50.59

$600.00

$708.30

$108.30

July

$100

$13.00

7.69

58.29

$700.00

$757.71

$57.71

Aug

$100

$15.00

6.67

64.95

$800.00

$974.28

$174.28

Sept

$100

$14.00

7.14

72.09

$900.00

$1,009.32

$109.32

Oct

$100

$16.00

6.25

78.34

$1,000.00

$1,253.51

$253.51

Nov

$100

$15.00

6.67

85.01

$1,100.00

$1,275.17

$175.17

Dec

$100

$15.00

6.67

91.68

$1,200.00

$1,375.17

$175.17

This scenario is probably the most realistic of the three investment scenarios in demonstrating actual conditions. Here your investments would should a profit of $175.17, or a 14.6% profit.

Dollar coast averaging is particularly useful to those investors with a long investment horizon and who can dedicate a certain amount for investments. The primary advantage of using a dollar cost averaging as an investment strategy is that it removes the problems associated with trying to time the market. In addition, most mutual fund companies and investment firms provide an automatic purchase plan. In fact, The Hoss uses the automatic purchase plan provided by his mutual fund company. It is very convenient and enables him to make purchases on a regular basis without fail.

Stay on track,

The Hoss


Next Hoss Cents Free Financial Money Magazine Post: April 19, 2009
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1 comment:

  1. I don't know about this topic more.But By reading your post I got impressed.Now I am interesting to know more about this.

    ReplyDelete

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