Dollar Cost Averaging

The Markets are Crazy.

They can go up and down and all around in such a short period of time, it can feel like you will never get a handle on them. And when they go down? Well, that's nothing but bad.

Or is it?

Dollar cost averaging is an interesting concept for when stocks are down. Provided that your investment is a good one, presumably you would be happy to invest in it at a lower cost as well as a higher.

Let's look at an imaginary stock called XYZ Computer Corp. Say that their stock is $10 per share and you buy 1000 shares. After you buy, the stock crashes down to $5 per share, losing you $5,000. Well, if the crash in stock price wasn't because of something bad at XYZ, and the company still has sound fundamentals, then it can be worth buying more. Say you buy 1000 more shares at $5. So, you have two batches of shares.

1000 @ $10
1000 @ $5

Now, what you just did by buying the stock at a lower cost was lower your average cost per share. At first, your price per share is $10. However, when you bought the shares at $5, your average cost drops to:

($10,000 + $5,000)/2000 = $7.50.

So, your average cost per share is now $7.50. It's like shopping on sale. If something was worth buying at $10, and there's nothing wrong with it, then presumably it's especially worth buying at $5. By lowering your average cost per share, you lower the point at which you start to make a profit.

So, rather than taking the lower markets as a negative, think of them as an opportunity. You never get excused from doing due dilligence, but you can shop for cheaper.

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Dollar Cost Averaging

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