Dollar Cost Averaging
Dollar-cost averaging is one of those concepts that sounds more complicated than it is.
You invest the same dollar amount at regular intervals. That’s it.
Say you’re putting $500 a month into an investment. If it’s trading at $20, you buy 25 shares. If it drops to $10, that same $500 buys 50 shares. If it jumps to $25, you buy 20 shares.
Lower price, more shares. Higher price, fewer shares.
For the Series 65, remember that when you’re investing equal dollar amounts and prices fluctuate, your average cost per share will be lower than the average price per share.
But don’t think I can’t lose money.”
You absolutely can.
If the market keeps falling, your account can keep falling with it. If you’re dollar-cost averaging into a terrible investment, you’re just consistently buying a terrible investment.
I think the more useful part of dollar-cost averaging is that it takes some emotion out of investing.
People love buying when the market has been going up and everything feels safe. Then the market drops 20% and suddenly they want to wait until things “settle down.”
Which usually means they want to wait until prices go back up.
With dollar-cost averaging, you’ve already made the decision. $500 goes in this month. Another $500 next month. You don’t need to figure out timing
If you’re contributing to a 401(k) every paycheck, you’re basically already doing this.
For the exam, keep it simple:
Equal dollar amounts at regular intervals.
Prices down = more shares.
Prices up = fewer shares.
Average cost per share is lower than the average price per share when prices fluctuate.
It does not guarantee a profit or protect against loss.