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
Previous Post: G20 Summit

G20 Summit

From the Hoss's Mouth

The G20 summit has ended. Hoss Cents Money Magazine has reviewed the statement issued by the G20 summit leaders (which can be found here). Before The Hoss comments on the commitments contained in that statement, I would like to say it is fantastic to see the USA emerge as a RESPECTED nation. This is due to President Barack Obama and the First Lady Michelle Obama showing themselves to be real people, with real ideas and real concerns for all people.



The G20 leaders have pledged to:

• restore confidence, growth, and jobs

• repair the financial system to restore lending

• strengthen financial regulation to rebuild trust

• fund and reform G20 international financial institutions to overcome this crisis and prevent future ones

• promote global trade and investment and reject protectionism in order to underpin prosperity
  

• build an inclusive, green, and sustainable recovery

Some of the steps to be taken to achieve these lofty goals are:

• G20 to increase resources available to the IMF (International Monetary Fund) to $750 billion.

• G20 to provide a new SDR allocation of $250 billion (The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.)
  

• G20 to provide at least $100 billion of additional lending by the MDBs (Multilateral Development Bank).

• G20 to provide support for trade finance up to $250 billion.

• G20 to provide additional resources from agreed IMF gold sales for concessional finance for the poorest countries.

• G20 to constitute an additional $1.1 trillion to restore credit, growth and jobs in the world economy.

• G20 to provide over $1 trillion of additional resources for the world economy through our international financial institutions and trade finance.

The G20 Summit leaders established an action plan and issued a declaration stating they will strengthen the financial system. In particular, they made the following commitments:

• to establish a new Financial Stability Board (FSB) with a strengthened mandate as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission

• that the FSB should collaborate with the IMF to provide early warning of macro-economic and financial risks and the actions needed to address them

• to reshape our regulatory systems so that G20 authorities are able to identify and take account of macro-prudential risks

The Hoss realizes that the leaders of the G20 must do more than just make commitments; they must also follow through with the required action. Many summits are held and many commitments made, but when leaders return home they do not take the necessary steps that would enable them to achieve what they have committed to do. Can you say Kyoto Accord? Let's hope the G20 leaders are truly determined to achieve all the goals contained in the G20 statement. If they do follow through with their commitments, it should lead to a worldwide economic recovery.

Stay on track,

The Hoss


Next Hoss Cents Free Financial Money Magazine Post: April 12, 2009
Previous Post: Has The Economic Recovery Started