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MOMENTUM NEWSLETTER
| CONTACTDOLLAR COST AVERAGING
Dollar cost averaging means investing a fixed amount of
money at fixed intervals of time. That's a sensible approach, for example,
if it means committing yourself to investing a fixed amount of your salary
every month toward your retirement.
Because more units are being purchased at lower unit prices than higher unit
prices, one can reduce the average cost of the investment. Dollar cost
averaging removes the market timing problem by imposing discipline on your
investment program.
The following hypothetical table demonstrates how dollar cost averaging
works over a 12 month period with $100 per month invested consistently.
|
Month |
Deposit |
Unit Price |
Units Acquired |
|
January |
$100 |
$7 |
14.29 |
|
February |
$100 |
$9 |
11.11 |
|
March |
$100 |
$7 |
14.29 |
|
April |
$100 |
$8 |
12.50 |
|
May |
$100 |
$8 |
12.50 |
|
June |
$100 |
$10 |
10.00 |
|
July |
$100 |
$10 |
10.00 |
|
August |
$100 |
$12 |
8.33 |
|
September |
$100 |
$13 |
7.69 |
|
October |
$100 |
$11 |
9.09 |
|
November |
$100 |
$12 |
8.33 |
|
December |
$100 |
$13 |
7.69 |
The average unit price over 12 months was $10.00 per unit
[unit price totals divided by the total number of months]. The investor's
average cost to purchase these units was $9.60 per unit [total investment
divided by total units purchased]. As you can see, the average cost per unit
was lower than the average unit price over the time period covered. The
investor was able to purchase more shares when the share price dropped and
fewer as it rose.
To commence this kind of investment plan, you may want to consider an
automatic chequing plan where monthly amounts are automatically transferred
with your permission from your bank account directly into your Segregated
Funds or Mutual Funds account. You may specify how much per month is to be
transferred on a particular day each month into your investment account. The
amounts you stipulate will automatically be directed into the fund you have
chosen.
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