Saturday, October 29, 2005

Dollar Cost Averaging

Dollar Cost Averaging

This is supposd be done to reduce market risk by investing in stocks or funds or etc on a regular time interval in set amounts. I read that instead of investing in a lump sum at the beginning of the year, it's better to spread the cost basis out over a longer period of time, which guards you against fluctuations in the market price.


If you set up an automatic plan with a mutual fund family, like I did, it's almost a brainless activity that's supposed to benefit you in the long run by buying shares regularly without paying any heed to the share price being low or high on that specific day.

However, I have set up a taxable account and a roth ira account at American Funds for about a year now with a monthly automatic investment plan. Freakishly enough, as I was looking through the past transaction history of these little regular buy-ins, the share price is the highest of the month or at least higher than regularly on the exact date that my automatic investment plan would buy shares.

Then, it would go down and down... and then by the time, the next buy-in date comes around, it'd be up again!!!

Is this just a stroke of bad luck for a year or do mutual fund share prices drop toward the last week of the month (which is when I have set up the plan to buy for me)??????


Now, I'm even considering changing the investing date to the middle or beginning of the month but I wonder if it would make any difference?! Does the economy do better at specific times of the month than at other times OR am I just being paranoid and not looking at the big picture like dollar cost averaging asks you to?

Points to ponder as I'm leaving for Knotts Berry Farm for some fun with my cousin, her husband, and my nephew. Of course, I've never really been to Knotts Berry Farm since I was a teenager, but this time around, it should be fun since I'll be seeing it through my little nephew's eyes. Ah kids....they're so adorable....until they ask you for money.


:)

4 comments:

  1. It could be just a coincidence you hit the highs in the recent months. If you feel this stream of bad luck is getting into you, then you may want to consider a semi-monthly automatic investment plan. Theoretically, a shorter time interval gives you more of the dollar-cost-averaging benefit. See my example below:

    SEMI-MONTHLY PLAN
    Month Price Amount Shares
    Jan $10 $20.00 2.000
    Jan $8 $20.00 2.500
    Feb $9 $20.00 2.222
    Feb $7 $20.00 2.857
    Mar $9 $20.00 2.222
    Mar $10 $20.00 2.000
    Apr $11 $20.00 1.818
    Apr $10 $20.00 2.000


    Total Amount: $160.00
    Total Shares: 17.620
    Average Price/Share: $9.08


    SEMI-MONTHLY PLAN
    Month Price Amount Shares
    Jan $10 $40.00 4.000
    Jan
    Feb $9 $40.00 4.444
    Feb
    Mar $9 $40.00 4.444
    Mar
    Apr $11 $40.00 3.636
    Apr

    Total Amount: $160.00
    Total Shares: 16.525
    Average Price/Share: $9.68

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  2. You know, I think that's just what I should do. Now, I wonder if i should divide the current monthly contribution and invest it semi-monthly or if i should double the current contribution and invest it semi-monthly.

    It shouldn't matter, should it?
    Thanks for helpful post. I am going to switch over to the semi-monthly plan as soon as I can get an appointment with my financial advisor for American funds.

    ReplyDelete
  3. Hi,

    I've found that it's helpful, for me at least :-) to try to understand how these things worth. It turns out that I've been thinking about DCA also and posted my musings if you're interested:

    http://rationalfinance.blogspot.com/

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  4. Another thing you could do with dollar cost averaging is have this money go directly into a money market fund and you make the tranaction into the market as you see fit.

    It takes time to get a feel for the market and it is impossible to time it but on the other hand when the market is at a high, you don't want to chase after it either.

    Smarty has a good idea also, let us know how things work out.

    I'm a newcomer to your site.

    ReplyDelete