Timing the market is difficult! You may achieve a greater return on your investment by taking advantage of a technique referred to as dollar cost averaging. Regularly investing a specified sum of money for a specified period of time will normally result in a higher overall investment value when compared to only making one initial investment.
Assume you invest $100/month over a 6-month period. The table below represents the cost for a share of stock for the month and the number of shares purchased:
rising price fluctuating falling, then price rising price cost shares cost shares cost shares Jan $14 7.14 $14 7.14 $14 7.14 Feb $15 6.67 $12 8.33 $13 7.69 Mar $16 6.25 $10 10.00 $ 9 11.11 Apr $17 5.88 $10 10.00 $ 5 20.00 May $18 5.56 $12 8.33 $ 5 20.00 Jun $19 5.26 $14 7.14 $10 10.00 ===== ===== ===== Total shares 36.76 50.94 75.94 Total value: $698.44 $713.16 $759.40 (The Total value is the price in June multiplied by the Total shares)The startling result is that dollar cost averaging can yield a higher return in a fluctuating or declining market than a continually rising market. An added opportunity to increase your total value is to purchase more market shares when the price is decreasing. The reason is because you will be purchasing more shares at a lower price, thus when the price increases you will have a much greater total value. Don’t get scared and sell your shares at the lower price because you will simply loose money and miss a great opportunity to earn more. Buy low, sell high!
Keep in mind dollar cost averaging does not always allow for you to quickly achieve a large return. If the market continually rises while you invest regularly, then the return will be less than if you had initially invested the entire amount. Although, dollar cost averaging provides you the opportunity to invest without putting a large amount of money up-front, which is best suited for most people.
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