Dollar Cost Averaging
Dollar-cost averaging is the practice of putting a fixed amount of money into an investment program at regular intervals — as you do when you invest in Savings Plus through payroll deductions. This strategy is designed to help you buy more shares or units when the prices are down and fewer when the prices are up, thereby averaging the price you pay per share and theoretically reducing the overall cost of the investment. You may be able to reduce the effects of volatility in your portfolio by using a dollar cost averaging strategy when you invest.
However, dollar-cost averaging does not assure a profit and does not guarantee against loss in a declining market. This type of strategy involves regular investment in securities regardless of fluctuating price levels of such securities. Investors should consider their financial ability to continue purchases through periods of low price levels.
For illustration, assume you will defer $100 each month ($1,200 a year) from your payroll check into an investment option and that the price of the shares or units of your investment rises and falls over time (See Chart Below). Over a 12-month period, the average price per share or unit shown in the chart is $6 ($72 ÷ 12 months = $6). If you were investing your $1,200 in a lump sum at that average price per share or unit, you would be purchasing 200 shares or units ($1,200 ÷ $6 = 200).
Under the dollar-cost-averaging method, your average cost per share or unit would be $5.33 ($1,200 ÷ 225 shares or units). You paid less per share or unit and were able to buy 25 more shares or units than if you had made a single lump-sum payment.
Dollar-Cost Averaging with Savings Plus
|Number of months||Periodic investment||Price of shares or units||Number of shares or units purchased|