Dollar Cost Averaging

Do not worry! There is no complicated math involved with with this. If you recall the post I made on Wednesday; I discussed how I picked up shares of FedEx at bargain prices. Although that specific style is known as “Value Investing” it may be too complicated to explain to the novice investor; don’t worry; you will get there. Anyway; one area of investing that I use is called, Dollar Cost Averaging.

Dollar Cost Averaging is when you buy shares of stock systematically, or better said, at specific timed intervals. This method is great for novice investors who risk being too emotionally attached or frightened due to the fear of missing out. The fear of missing out generally coincides with buyer’s remorse. Did I buy the right stock? Did I buy at the right time? Did I buy at the right price? Will it go up? Will it go down? These are all valid fears and concerns and luckily, dollar cost averaging helps confront these issues.

I have often found, especially in my early years; that volatility in the market can be useful; essentially; stock declining in price is a good thing rather than consistent increases in price. Remember, I invest for the purposes of cash flow; so I am always looking to maximize the number of shares outstanding; which is what dollar cost averaging helps you do.

Let’s look at a real life example from my ESPP program. Below I have outlined real purchases on the left and fictional purchases on the right. Notice that because of the volatility; you end up acquiring more shares, as opposed to a generic steady increase. This is insightful because everyone wants the steady, guaranteed increase, but be careful what you wish for; because if you seek that; then you will lose.

Real purchases are to the left
for NYSE: CB ; fictional purchases are to the right with assumed steady increases based on 5% growth per 6 months. Note that only certain brokers allow you to purchase partial shares.

As you can see from the above; you end up doing much better with the stock price moving up and down. By handling the emotional disconnects with the volatility; I have ended up with $20 more per year in dividends. Not to mention if you only have $1,000 every 6 months to invest and the stock steadily increases; eventually it will reach a point where you can no longer invest; so this steady growth is really undesirable.

So, if you really want to get started in investing; pick a stock with a wide moat and start buying in systemic increments over time. Eventually you will see the balance rise and the dividends payout to join in on the rising. This is what you are looking for; you just have to start and not be overly concerned with your win/loss ratio in the yearly years.

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